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AGFEED INDUSTRIES INC 10-K 2009

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

 x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2008
   
 o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from  ___________ to _____________

Commission File No. 001-33674

AgFeed Industries, Inc.
(Exact Name of Registrant as Specified in Its Charter)

Nevada 
 
20-2597168
(State or Other Jurisdiction
of Incorporation or Organization)
 
 (I.R.S. Employer Identification No.)

Rm. A1001-1002, Tower 16
Hengmao Int'l Center
333 S. Guangchang Rd.
Nanchang, Jiangxi Province, PRC 330003
(Address of Principal Executive Offices, including zip code)

011-86-0791-6669093
(Registrant’s Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act:
Common Stock, $0.001 par value
 
The Nasdaq Stock Market LLC
(Title of each class)
 
(Name of each exchange on which registered)

Securities registered under Section 12(g) of the Exchange Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  o          No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o           No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x   

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of  “large accelerated filer," "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act (check one):
 
Large accelerated filer o
  
Accelerated filer x
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o    No x

On March 10, 2009, 38,300,436 shares of the registrant’s common stock were outstanding.

The aggregate market value of the voting stock held by non-affiliates as of June 30, 2008 was approximately $280,527,067.

Documents Incorporated by Reference:> Portions of the registrant’s proxy statement for its 2009 annual meeting of shareholders, which the registrant expects to file with the Securities and Exchange Commission ("SEC") within 120 days after December 31, 2008 are incorporated by reference into Part III of this annual report.

 

 

TABLE OF CONTENTS
   
Page
 
PART I 
 
     
Item 1.
Business
1
Item 1A.
Risk Factors
17
Item 1B.
Unresolved Staff Comments.
30
Item 2.
Properties
30
Item 3.
Legal Proceedings
34
Item 4. 
Submission of Matters to a Vote of Security Holders
34
     
 
PART II 
 
     
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
35
Item 6.
Selected Financial Data
38
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
39
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
48
Item 8.
Financial Statements and Supplementary Data
49
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
49
Item 9A.
Controls and Procedures
49
Item 9B.
Other Information
53
     
 
PART III 
 
     
Item 10. 
Directors and Executive Officers of the Registrant
54
Item 11.
Executive Compensation
54
Item 12. 
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
54
Item 13.
Certain Relationships and Related Transactions
54
Item 14.
Principal Accountant Fees and Services
54
     
 
PART IV
 
     
Item 15.
Exhibits and Financial Statement Schedules
54
     
SIGNATURES
 
   
EXHIBITS
 
 
 

 

The statements contained in this annual report that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations and business, which can be identified by the use of forward-looking terminology, such as “estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or the negative thereof or other variations thereon, or by discussions of strategy that involve risks and uncertainties.  Management wishes to caution the reader of the forward-looking statements that such statements, which are contained in this annual report, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors, including, but not limited to, economic, competitive, regulatory, technological, key employee, and general business factors affecting our operations, markets, growth, services, products, licenses and other factors discussed in our other filings with the Securities and Exchange Commission ("SEC"), and that these statements are only estimates or predictions.  No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of risks facing us, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events.
 
These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by us in those statements. Some of these risks are described in “Risk Factors” in Item 1A of this annual report.
 
These risk factors should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All written and oral forward-looking statements made in connection with this annual report that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.  Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events. Further, the information about our intentions contained in this document is a statement of our intention as of the date of this document and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices, the economy in general and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.
 
PART I
 
In this Annual Report on Form 10-K, we will refer to AgFeed Industries, Inc., a Nevada corporation, as "AgFeed," "our company," "we," "us," and "our."
 
Item 1.  Business.
 
OVERVIEW
 
We are a Nevada corporation engaged in the feed and commercial hog producing business in the People's Republic of China ("China" or the “PRC”) through our operating subsidiaries. Our principal executive offices are located at Rm. A1001-1002, Tower 16, Hengmao Int'l Center, 333 S. Guangchang Rd., Nanchang, Jiangxi Province, PRC 330003. Our telephone number is +86-0791-6669099. Our website is http://www.agfeedinc.com.
 
Our feed business consists of the research and development, manufacture, marketing and sale of premix feed and blended feed for use in the domestic animal husbandry markets, primarily for hog production in China.  Premix is an animal feed additive that is broadly used in commercial animal production worldwide. The use of premix feed can significantly reduce an animal’s growth cycle, enabling the animal to reach market size sooner. We have been in the premix feed business since 1995 and now operate five premix feed manufacturing facilities located in the cities of Nanchang, Shandong, Shanghai, Nanning, and Hainan.
 
 
1

 

We entered the hog breeding and production business in November 2007.  In this business, we mainly produce hogs for slaughter and sell breeding stock.  We have one breeder farm and 29 meat hog producing farms in the Jiangxi, Shanghai, Hainan, Guangxi and Fujian provinces.
 
We were incorporated as Wallace Mountain Resources Corp. on March 30, 2005 in Nevada.  Since October 31, 2006, our principal place of business has been based in China.  As a result of a merger into a wholly-owned subsidiary, we changed our name to AgFeed Industries, Inc. on November 17, 2006.
 
FEED BUSINESS
 
We manufacture, distribute, market and sell two main product lines - additive premix fodder for use in all stages of a pig’s life, and blended feeds. We conduct these operations through our subsidiaries Nanchang Best Animal Husbandry Co., Ltd. (“Nanchang Best”), Shanghai Best Animal Husbandry Co., Ltd. (“Shanghai Best”), Guangzxi Huijie Sci. & Tech. Feed Co., Ltd., (“Guangxi Huijie”), Shandong AgFeed Agribusiness Co., Ltd. ("Shandong Feed"), and Hainan HopeJia Feed Co., Ltd. ("HopeJia"). We also provide extensive technical and veterinary support free of charge to our customers.
 
Nanchang Best, Shanghai Best, Guangxi Huijie, Shandong Feed and HopeJia are collectively referred to as our "feed operating companies."  They operate manufacturing facilities in Nanchang, Shanghai, Nanning, Shandong, and Hainan provinces, respectively.  Nanchang Best and Guangxi Huijie are primarily responsible for our ongoing research and development efforts and share their expertise in this area with all of our manufacturing operations.  There are no formal written agreements relating to these services as each of these companies are our wholly owned subsidiaries.  AgFeed has received “Green Certification” from the Minister of Agriculture of PRC for its premix products under the brand label “BEST.” This green certification laid the ground for our Hog Farms to produce hogs providing green pork.
 
Products
 
Livestock producers may directly buy animal feed in finished form, referred to as “blended” feed, which contains a concentrate of additive premix fodder (“premix”) and the foundational grains blended together, or, they may choose to buy the premix and then combine it with protein, corn, hay, wheat and other elements readily available in the market to make their own blended feed. Additive premix fodder provides the essential amino acids and binder necessary for proper absorption of protein by pigs. Feeding pigs a balanced diet is an essential part of the pork profit equation. Management estimates that feed costs comprise 60-75% of a Chinese piggery’s expenses; therefore the quality of feed and nutrition has a significant effect on piggery profits.
 
Our total combined feed output in 2008 was approximately 76,324 metric tons, consisting of 41,266 metric tons of premix fodder, 34,098 metric tons of blended feed, and 960 metric tons of other feed products.
 
Pork premix
 
According to the different growth stages of a pig, different additives are necessary to accelerate the growth of the animal and provide safe products for consumption. Premix additives are composed mainly of essential amino acids, vitamins, minerals, antibiotics and growth promoters. We market 21 different brands of premix fodder that are priced from standard to premium to satisfy wide ranging customer demand. Within each brand there are 7 different mixes that correspond to the different stages of a pig’s life cycle: newborn to 15 kg, 15-30 kg, 30-60 kg, market ready, over 60 kg boar, mating/pregnant and lactating. We provide superior customer service by customizing the premix to the specific needs of each customer. Large scale pig farms are typically the biggest consumers of our premix. Our veterinarians work with these large pig farms to determine the optimal formulation of feed.
 
 
2

 

Premix sales represent approximately 54% of our annual feed revenues and carry a gross profit margin of approximately 36.8%. Our ability to formulate customized premix fodder to meet customer specifications enables us to charge a premium for our products. The average price of our premix is $875/metric ton. We are also able to justify premium pricing due to the strong brand name recognition of our operating companies, hands-on after market support, and superior, more effective products developed as a result of a strong R&D program. Large scale piggeries are willing to pay a premium for more effective products as they are concerned with producing healthy piglets, controlling disease and marketing profitable pork products.
 
Piglet blended feed
 
Our piglet blended feed is designed to both nourish and protect newborns and is composed primarily of proteins, such as fish meal and soy bean (30%), and raw material grains, such as corn and chaff (roughly 65%). Local climate and environment also influence the formulation of the piglet blend.
 
We sell blended feed for an average price of $658/metric ton. Blended feed contributes approximately 45% to our total feed revenues and has a gross margin of approximately 17.2%. As a result of government policies aimed at enhancing the commercialization of the hog industry and greater regulation requiring safeguards to the country’s food supply and food safety, we enjoy strong competitive edge in the pork premix feed market and the piglet blended feed market.
 
Market Information
 
The feed industry in China, initially developed during the 1980s, was transformed by the issuance of the feed and feed additives regulations in the early 1990s. These regulations emphasized labeling standards for the different grades of product. These standards assisted in regulating the feed industry’s expansion and aimed to eliminate substandard products and fraudulent labeling.
 
China’s feed manufacturing industry is second only to the United States in volume. The feed industry grew to approximately 66 million tons in 1998, after growing at an annual rate of 15% from 1990 to 1998, and approximately 107 million tons in 2005 and 111 million tons in 2006.  In 2007, China's feed industry grew to 123 million tons, 112 times the size in 1980. As incomes rise in China, annual meat consumption is expected to rise from the current 53 kg per person to around 70 kg per person in the coming years. The country's annual pork consumption almost doubled from 20kg per person in 1990 to 40kg per person in 2006.  According to a report by the USDA Foreign Agricultural Services, developing countries average 24 kg per person annually while developed countries average 75 kg per person annually. It is estimated that 4 kg of feed grain are needed to produce 1 kg of pork.
 
The animal feed industry in China is highly competitive with many regional players and locally recognized brands. We believe that the initial capital requirements with respect to entry into the industry are low, and consequently there is a great deal of competition between many smaller companies. The animal feed sector for pork has three primary markets:
 
 
·
additive premix fodder;
 
·
proteins; and
 
·
blended feed.
 
We predominantly produce premix and blended feeds and do not presently compete in the protein market. A nutritionally complete feed includes three components: energy sources, such as course grains; protein sources, such as fish and soy meals; and premix consisting of essential amino acids, vitamins, minerals, antibiotics and growth promoters. Premix and proteins together are often referred to in the industry as “concentrate.” Premix fodders require greater technology to produce, and are often customized to each customer’s specifications. As such, premix carries the highest selling price per metric ton of all feed components. Livestock producers may directly buy animal feed in finished form, referred to as “blended feed,” or buy the component ingredients and mix the blend on their own. Typically, large-scale piggeries will purchase premix, as they have the scale to mix their own blended feeds.
 
 
3

 

Blended Feed Industry
 
According to published reports from the China Feed Industry Association and the Bureau of Animal Husbandry, Ministry of Agriculture of the PRC, the blended feed market for pork was approximately $12 and $14 billion for 2004 and 2005, respectively. The largest player in the market had approximately a 7% market share, and 40 companies shared the top 33% of the market. From 2000 to 2006, blended feed sales have grown at an average annual rate of 4.5%. From 2005 to 2006, blended feed sale growth was 4.6%.  Pork blended feed production grew approximately 0.61%, to 24.1 million metric tons, from 2006 to 2007 and sales increased 3% over 2006 levels.
 
Premix Industry
 
From 2000 to 2006, according published reports from the China Feed Industry Association and the Bureau of Animal Husbandry, Ministry of Agriculture of the PRC, premix industry sales grew at an average annual rate of 13.5%. There is no single dominant participant in China's premix market.  Pork premix production for 2007 was 2.8 million metric tons, up 5% from 2006, while sales remained level.
 
Sales and Marketing
 
Nanchang Best and Shanghai Best have aggressively marketed and promoted the “Best” brand since their inception. Guangxi Huijie markets its products under the “Huijie” brand name. HopeJia’s feed products are marketed under the brand name “HeJie” and Shandong markets its products under the “AgFeed” brand name.  Our feed operating companies send their sales force and technicians to the pig farms to educate their clients on new product developments and improvements to existing products. They also conduct educational seminars in pig farming regions to explain the benefits of a balanced, nutritious diet for pigs in producing a healthy herd and to educate farmers to properly prepare and mix feed components. While these services are not unique among premix manufacturers, we believe our services in this area are superior to our competitors as we have a highly responsive and experienced technical services team while our sales persons, most of whom majored in animal or veterinary science, are equipped with general service capabilities.  As we market and sell directly to pig farmers, we are able to collect and analyze data which assists in the preparation and design of new products. We attend agricultural conventions that take place in the market areas where we conduct business as well as in provinces that we expect to enter. We also place advertisements and promotional pieces in agricultural trade journals.
 
We sell our products directly to over 660 large-scale pig farms and to distributors reaching to the smaller privately-owned farms and backyard farmers. The sales data of distributors indicates that smaller farms tend to be more sensitive to price increases than the large-scale piggeries, with large-scale hog farms placing more emphasis on customer service and other ancillary services we provide.
 
Starting in January 2007, we began to work with independently-owned and operated premix feed product distribution stores that exclusively distribute AgFeed brand premix feed products throughout China. This program allows us to cost-effectively sell our products to the individual “mom and pop” farmer that may raise only a few hogs per year for personal consumption or for sale in the marketplace as an additional source of income. These distribution stores generally sell 3 to 5 metric tons of feed per month.  As of December 31, 2008, there were more than 1,000 locations open and operating using the AgFeed brand name.   These distributors do not pay an initiation fee to become exclusive distributors of our products but do receive marketing and technical training from our staff. Each distributor signs an exclusive agreement with us, agreeing not to sell any other brand of animal feed products and to decorate its store with approved AgFeed marketing materials and signage.  Additionally, these distributors are encouraged to buy animal health care products, such as quality vaccines and veterinary drugs that we sell as agent, benefiting from a diversified product structure.
 
 
4

 

In addition, each distributor must: (i) during a three month probationary period pass a screening process based on performance benchmarks, (ii) abide by our rules and receive ongoing training from our sales and technical staff, (iii) support the sales of new AgFeed products when launched in the distributor’s territory, and (iv) remain within our guidelines for payment of products purchased from us.
 
Distributors receive discounted prices from the regular wholesale listed prices and have payment terms that are typically 15 days from the date of sale. These discounted prices earn the distributors an increased gross profit margin of approximately 5-10%. They build a relationship with the small farmers that in many cases are illiterate and continue to do business as they have always done. As part of the distribution arrangement, they have a specified territory that entitles them to the exclusive right to sell AgFeed products to small farm owners in that territory.
 
As of December 31, 2008, each of the feed operating companies has the following customers for their respective feed products:
 
   
Local
Distributors
   
Large Scale
Pig Farm
   
Distribution
Chain Stores
   
Total
 
Nanchang Best
    85       202       320       607  
Shanghai Best
    138       206       191       535  
Guangxi Huijie
    126       189       301       616  
Shandong Feed
    78       15       101       194  
HopeJia
    46       57       89       192  
 
Suppliers
 
Normally, purchases of raw materials are made on an “as needed” basis each month. Orders are managed by both our warehouse and purchasing managers together, each of whom is familiar with on-site inventory levels. We sign long-term contracts with leading soybean meal suppliers when our purchasing specialists deem it appropriate.  We have also established long-term relationships with “accredited key suppliers” by setting up five supply bases in China’s largest corn production areas which centralize our purchasing and logistics resources, and reduce and remove agent commissions.
 
We have implemented a "supplier accreditation system."  Regularly, suppliers of raw materials are jointly selected and rated by our purchasing center and technical center according to the quality of their supplies, price and credit record. Generally, all of our purchases are made from qualified suppliers. Raw materials are generally purchased by our purchasing center to take advantage of the economies of scale associated with our size.
 
Research and Development
 
We engage in continuous research and development to maintain a competitive advantage in the marketplace and keep pace with current developments.  We conduct these activities primarily through Nanchang Best and Guangxi Huijie. Their research and development results are shared with each of the feed operating companies. We also sponsor research alliances with Jiangxi Agricultural University, South China Agricultural University, Nanjing Agricultural University and Zhejiang Agricultural University.
 
In addition to sponsoring national and provincial academic research projects at various academic institutions, in November 2004, Nanchang Best launched a fund called Best Fund contributing RMB 98,000 (US$12,250) to sponsor 12 research projects at Jiangxi Agricultural University. Nanchang Best retains proprietary rights to any research findings from these projects.
 
 
5

 

Intellectual Property
 
We have registered the "AgFeed," “Best,” “Huijie,” and "HeJie" trade names used on our products with the China Trademark Bureau and these names are known in the provinces in which we conduct business.  We do not hold any patents or intend to apply for patents on proprietary technology or formulas relating to our feed products. The formulas for our feed products are considered trade secrets and are protected as such.
 
Government and Environmental Regulation
 
Our feed products and services are subject to substantial regulation by governmental agencies responsible for the agricultural and commerce industries.  We are required to obtain business and company registrations and production licenses under the laws and regulations of the PRC, the provincial governments of Jiangxi, Shanghai, Hainan, Shandong, and Guangxi provinces and the Shanghai City government.  All of our feed products are certified on a regular basis and must be in compliance with the laws and regulations of provincial and other local governments and industry agencies.
 
Prior to engaging in any production or marketing of feed products, all products must receive a earned formal approval production number pursuant to the National Code of Feed and Feed Additives, promulgated by the National State Council of the PRC and qualified products reports from the Technology and Supervision Bureau.  All of our feed products have earned these formal approvals, which are valid for five years from the date of issuance.
 
There is no material cost in obtaining and maintaining these licenses, but it is illegal to do business without them.  If any production license or product permit were lost, production would need to cease until a new license or permit was obtained, which would likely take a minimum of 30 to 45 days to receive, and the loss of which would result in the possibility of regulatory fines.
 
We are also subject to China’s National Environmental Protection Law as well as a number of other national and local laws and regulations involving pollutant discharge and air, water and noise pollution.
 
The central government, through the Ministry of Agriculture, issues production licenses. The Ministry of Agriculture dispatches officials at the local level to review staff qualifications, production facilities, quality control, and management departments for competency.  These licenses are valid for five years from the date of issuance.
 
Provincial production permits are also required for all entities involved in the manufacture of animal feed and feed components.  Provincial permits are issued for all products manufactured at each facility. Each facility has the necessary permits for all products produced at each of our operating facilities. These permits are valid for five years from the date of issuance.
 
Competition
 
The premix market in China is particularly fragmented with many companies and locally recognized brands. The largest player in the premix industry commands slightly more than 1% of the national market and no one company has yet taken a sizable market lead in terms of service, brand, or technology. Nanchang Best leads the pork premix market in the Jiangxi Province with an approximate 4% market share and also sells its products in neighboring regions such as Hubei, Henan and Fujian. Nanchang Best faces price competition from Da Bei Nong, one of its competitors in the large-scale farm market.  We believe Da Bei Nong’s service is considered inferior to Nanchang Best’s, which has contributed to Nanchang Best's ability to maintain its lead in sales.
 
 
6

 

Sales made by Nanchang Best and Shanghai Best in Fujian province face strong competition in the large-scale piggery market from Fuj Minke Biology Company, which has well-known service, a flexible credit policy, and prices that are competitive with, if not lower than, the prices at which Nanchang Best and Shanghai Best sell their products. While both Nanchang Best and Shanghai Best are working to further develop and strengthen their connections to large-scale farms, Fuj Minke Biology Company does not pose a threat to their distributor sales.
 
Zheng Da, the Sino-Thai joint venture of Charoen Pokphand, the largest business conglomerate in Thailand, is one of the largest premix producers.  However, based on informal discussions that we have had with our customers, its prices tend to be higher than the prices at which Nanchang Best and Shanghai Best sell their products, though there is not a significant difference in the quality of their products. Zheng Da focuses only on the distributor market.
 
Based on our independent investigations in the Shanghai area, Xinnong leads the market in sales with approximately 15,000 metric tons per year, competing directly with Shanghai Best on both pricing and service to large scale piggeries.
 
Guangxi Huijie has an approximate 13% share of the overall feed market in its home province of Guangxi and competes directly with Guangxi Provimi. Guangxi Provimi sells the same products as Guangxi Huijie at similar price points and is considered by the marketplace to offer a product of similar quality to Guangxi Huijie’s.  We believe that Guangxi Provimi does not provide the same quality of after sale technical support to its customers.  Guangxi Huijie stands out in its market by providing its independently-owned distribution stores with an all-inclusive product package that includes quality veterinary drugs, vaccines, raw materials and breeders in addition to animal feed.
 
HopeJia leads the premix market in Hainan Province with an approximate 25% market share.  The direct competition facing HopeJia is not its competitors, but its own ability to upgrade customized products. HopeJia is enhancing its competitiveness in the blended feed market, benefiting from the economies of scale resulting from the synergies in our businesses.  It mainly competes with SBT and JiaDa as they have lower prices and have been in business in this area longer than HopeJia.
 
Shandong Feed is a newly founded premix feed company in Shandong Province.  Benefiting from AgFeed’s 14 year experience in the manufacturing, research and development, sales and marketing of pork premix feed, it is winning increasingly broader acceptance from the customers with its quality and high cost performance.
 
Employees
 
As of December 31, 2008, our feed operating companies had a total of 459 employees. The breakdown of our employees by location and department is:
 
   
Nanchang
Best
   
Shanghai
Best
   
Guangxi
Huijie
   
Shandong
Feed
   
HopeJia
 
                               
Management
    2       2       2       2       2  
General Administration and Human Resources
    9       10       8       2       7  
Production
    39       21       50       12       36  
Sales
    56       31       42       29       23  
Purchasing
    1       1       3       1       1  
Finance
    7       6       5       3       3  
Technical Services
    7       2       2       1       3  
Quality Control
    2       2       7       3       5  
Research and Development     2       1       4       1       1  
 
 
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Facilities
 
Nanchang Best is located in Chang Bei District Industrial Park, in Nanchang, Jiangxi province. It owns three buildings, one each for the office, manufacturing and an employee dormitory. Nanchang Best has been granted the right to use the land in Nanchang by the Municipal Administration of State-Owned Land through December, 2049.
 
Shanghai Best is located in Qingcun Town, Fengxian District, Shanghai. It rents two workshop buildings and office space on which it conducts all manufacturing and business operations. The annual rent on the Shanghai property is approximately $80,000 and the lease runs through December 2017.
 
Guangxi Huijie is located in Coastal Industrial Park, Liangqin District, Nanning City, Guangxi Province. Guangxu Huijie owns three buildings, an office building, production plant and an employee dormitory. The right to use the land was granted by Housing Bureau and Land Administrative Bureau of Langqin District, Nanning City through October, 2056.
 
Shandong Feed is located at No. 4 Chuangye Street, East New Area, in the city of Taian, Shandong Province.  This facility consists of four buildings, one each for manufacturing, offices, warehouse and dormitory facilities. Shandong Feed has been granted the right to use this land by the Shandong Provisional Government through July, 2052.
 
HopeJia is located on South Wuting Road, Laocheng Development Zone, Chengmai County, Hainan Province.  HopeJia owns three buildings, an office building, production plant and an employee dormitory. The right to use the land was granted by Housing Bureau and Land Administration Bureau of Hainan Province through Januar,y 2056.
 
Commercial Hog Producing Business
 
We raise, breed and sell hogs for use in China's pork production and hog breeding markets.  We own one breeder farm and 29 meat hog producing farms located in Jiangxi, Shanghai, Hainan, Guangxi, and Fujian provinces, which are strategically located in or near the largest pork consumption areas in the PRC.
 
We entered the hog farming business on November 9, 2007 as a result of our acquisition of ninety percent (90%) of the capital stock of Lushan Breeder Pig Farm Co., Ltd. ("Lushan").  Lushan owns and operates a breeder hog farm occupying 258,000 square meters located in the town of Hualin in Xingzi County, Jiangxi Province.  Lushan is a mid-scale hog farm engaged in the business of raising, breeding and selling hogs in the PRC for use in the pork production market in the PRC.  Lushan operates as a majority-owned subsidiary of Nanchang Best.  In 2008, we acquired at least a majority interest in 29 meat hog producing farms in the Jiangxi, Shanghai, Hainan, Guangxi, and Fujian provinces through our subsidiaries - Nanchang Best, Shanghai Best, Guangxi Huijie and Jiangxi Best Swine Development Co. ("Best Swine").
 
Hog Production
 
Our 29 meat hog producing farms generate revenue primarily from the sale of meat hogs to slaughterhouses.  Our meat hogs are sold primarily in Jiangxi, Shanghai, Hainan, Guangxi, Fujian, Guangdong and other neighboring provinces.  
 
Lushan generates revenue primarily from the sale of breeder hogs to commercial hog farms and, to a lesser extent, the sale of meat hogs to hog slaughterhouses.  It also generates revenue by providing consulting services to hog farmers in the areas of feed production, feed formulation and veterinary services.  Lushan's customers include large-scale hog farms, mid-scale hog farms and small-scale farms.  Our breeder hogs are sold throughout the PRC, primarily in southeastern China.
 
 
8

 

Breeder hogs are either purebred hogs or crossbred hogs that have the genetic trait for mating.  Lushan uses hogs that contain this trait for breeding and it also sells them to commercial meat hog farms throughout the PRC so that the commercial farms may use the hogs in their own reproduction programs.  Commercial sows (parent stock) are used for gestating and producing piglets.   
 
Among the purebred hogs, Lushan’s primary varieties are the Yorkshire, the Landrace and the Duroc.  The Yorkshire, which originated in England, is known for its rapid growth, high rate of lean meat and its reproductive capacity.  The Landrace, originated in Denmark, is also known for its rapid growth and its high rate of lean meat.  The Duroc, which originated in the United States, is considered a highly-successful male parent in crossbreeding.
 
Market Description
 
General
 
China is the world’s biggest hog producer and pork consumer; the global pig meat market is dominated by China.  According to statistics from the US Department of Agriculture, China produces 50% of all the pig meat production in the world. For 2009, China is expected to produce close to 47.0 million metric tons of an estimated world production of approximately 95.0 million metric tons.
 
According to a 2008 Agricultural Report published by Purdue University, China’s pork production in 2009 is forecast to recover 3% to 46.8 million metric tons up from the 2008 production of approximately 45.6 million metric tons.  China had approximately 592 million head of hogs at the end of 2008, up from 2006 and 2007.  Production in those years was affected by PRRS (Blue Ear Disease).  This disease is now effectively under control and is not anticipated to have a negative effect on China's hog production in 2009.  During late 2007 and the first half of 2008, short pork supplies pushed prices up sharply. Increased food prices were major factors in the rise of China's consumer price index.
 
China consumes over 500 million pigs a year.  In terms of meat consumption in China, beef accounts for approximately 9%, poultry for approximately 21% and pork for approximately 65% of total Chinese consumption, according to the National Statistics Bureau of China.  China’s pork consumption is forecast to increase to 47.0 million metric tons up from 44.9 million metric tons in 2008, an increase of about 3%. Projected pork demand by 2015 is estimated to approach 68.0 million metric tons, an increase of 45%.
 
Urbanization and the growth of the middle class (250 million people in 2008) along with PRC policies protecting the swine industry reflect the importance of hog production as a social, economic and security issue for the consumer market in China. The PRC instituted a number of laws to induce swine production. On January 1, 2008, the State Council announced a new regulation exempting companies involved in hog rearing from corporate income tax. Additionally, the Food Safety Law, which becomes effective on June 1, 2009, allows the government to take affirmative action that will strengthen food safety control “from the production line to the dining table.” The PRC Government is creating a hog futures exchange to permit hedging of contracts.  This is expected to be operational in the latter half of 2009.  Further, the Government has developed a "Strategic Meat Reserve" that is stocked predominantly with pork reserves and a live herd of 500,000 pigs.  These policies and programs stress the value the central PRC Government places on hog production.
 
Meat Hogs
 
According to the Foreign Agricultural Services, the PRC is the world’s largest producer of pork and pork is the most widely-consumed meat in the PRC.  The Foreign Agricultural Services determined that pork accounted for 65% of the total meat production in the PRC in 2008. A 2008 Agricultural Report published by Purdue University forecasts that China’s pork imports in 2009 may increase by nine percent to 555,000 million metric tons slightly up from 505,000 million metric tons in 2008. Strong demand and short supply are forecast to drive imports, although it appears the recent downturn in the global economic picture will curtail the Chinese import of both frozen and live swine.  There are over 40 local pig breeds in China.  Chinese farms are looking to import foreign breeds that may improve the genetic profile of the PRC's hog population, with the result being healthier animals and lower production costs.
 
 
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Meat hog production in the PRC is dominated by backyard farms (those that sell 5-10 hogs annually) and small farms (those that sell less than 100 hogs annually).  These farms accounted for an estimated 75% of all PRC hog production during 2008.  These farms sell their products to local rural markets.  The remaining 25% of the PRC's hog production comes from larger farms - those that sell between 100 and 500 head a year account for 21% of the production, those that sell between 500 and 10,000 head account for an additional 3% and those that sell between 10,000 and 50,000 hogs account for the remaining 2% of the annual production.
 
Suppliers
 
Feed is the most significant cost of operating a hog farm.  Historically, our Hog Farms purchased feed products and raw materials such as corn and soybeans from several feed suppliers under short-term contracts.  Under our ownership, the Hog Farms primarily use our premix as the base of their feed supply and enter into long-term contracts with the suppliers of feed additives in order to meet their feed requirements.  The use of our premix laid the groundwork for our Hog Farms to produce hogs that are accredited as "green" pork.
 
Research and Development
 
We have a seven member research and development team devoted to hog farming.  Two members of the team have doctorate degrees and three have masters degrees in veterinary science and/or animal breeding and genetics.  We are participants in two ongoing research programs.  We have been selected into the National Hog Production System, where individuals from China's top 52 hog farms share their expertise and research and development results.  We are also a member of the National Pig Genetics Association which focuses on the selection of high-lean meat breeder hogs and the other program focuses on improving the reproductive traits of breeder hogs.
 
Intellectual Property
 
Lushan has developed advanced mating technologies that are designed for foreign and domestic breeder hogs.  It employs proprietary techniques to manage mating patterns.  We do not hold any patents covering these technologies and have no present intention to apply for patents on them.
 
Government Regulation
 
Hog breeding is subject to substantial licensing requirements and regulation.  In order to sell breeder hogs in the PRC a breeder hog farm must be awarded a breeder’s license by the local government authorities.  Only those breeder hog farms that have qualified staff, specialized equipment and are in segregated locations to avoid the spread of disease are eligible for licensing.  Meat hog farms do not require a license.
 
The Agricultural Department of Jiangxi Province issued a Breeder Hog Farm License to Lushan which is valid until April 1, 2010 and is renewable in three-year increments.
 
Competition
 
The hog production business in the PRC is highly segmented.  As we discussed above, about 75% of the hogs produced in the country are produced by smaller farms, who sell their inventory to rural markets.  Of the remaining 25% of hog producers, they are spread throughout the entirety of the PRC and the market for their inventory tends to be within their geographic territory.  AgFeed primarily markets its products within Jiangxi, Shanghai, Hainan, Guangxi and Fujian provinces and the territory of the surrounding provinces that is close in proximity to our Hog Farms.  As a result, we compete broadly with the producers in these geographic regions.  However, none of our Hog Farms face competition from one or two single, significant customers.  Our hog production business occupies the whole of southeastern China, including the metropolitan areas of Shanghai and Hong Kong.
 
 
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Employees
 
As of December 31, 2008, our hog farms had a total of 1,398 employees, 51 of whom are employed by Lushan. The breakdown of our employees by location and department is:
 
   
Lushan
   
Meat Hog
Producing Farms
 
General Management
    1       90  
Production Administration and Technicians
    6       238  
Research and Development
    1       5  
Farm Labor
    31       747  
Finance
    4       86  
Administration
    8       181  
 
Facilities
 
Breeder Farm
 
Lushan’s primary facility is a breeder hog farm located in the town of Hualin in Xingzi County, Jiangxi Province.  The facility, which is situated on 258,000 square meters of developed land, is leased from the Chinese government for a period of 29 years and is scheduled to expire on April 13, 2034. Lushan’s breeder hog farm contains two separated areas, one for sows and the other for boars and gilts, with a total of 15,800 square meters of buildings.  Lushan pays a nominal annual rent under the terms of the lease.
 
Meat Hog Producing Farms
 
Wannian Xiandai Animal Husbandry Limited Liability Co. (“Wannian”), a wholly owned subsidiary of Nanchang Best, is located in Nanyan village in the town of Peimei in Wannian county, Jiangxi Province.  Wannian subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.   The lease runs for 10 years from January 3, 2008.
 
Jiangxi Huyun Livestock Co., Ltd. (“Huyun”), a majority owned subsidiary of Nanchang Best, is located in the town of Huyun in Wannian county, Jiangxi Province. Huyun subleases the property from the other shareholders of Huyun and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 10 years from January 3, 2008.
 
Ganzhou Green Animal Husbandry Develop. Co., Ltd. (“Ganzhou”), a majority owned subsidiary of Nanchang Best, is located in Yuliang village in the town of Hengshui in Chingyi County, Ganzhou City, Jiangxi Province.  Ganzhou subleases the property from the other shareholders of Ganzhou and includes the land, pig houses, office buildings, heating system, power and water supply system.   The lease runs for 10 years from January 4, 2008.
 
Gang Feng Animal Husbandry Co., Ltd. (“Gang Feng”), a wholly owned subsidiary of Nanchang Best, is located in the town of Fenglin in Dean county, Jiangxi Province. Gang Feng subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 6 and 1/2 years from January 7, 2008.
 
 
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Yichun Tianpeng Domestic Livestock Farm, Ltd. ("Yichun"), a majority owned subsidiary of Nanchang Best, is located in Nanmiao Township, Yichun City, Jiangxi Province.  Yichun subleases the property from the other shareholders of Yichun and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 10 years from January 9, 2008.
 
Zhejiang Pinghu Yongxin Hog Farm (“Zhejiang Yongxin”), a wholly owned subsidiary of Nanchang Best, is located in Pinghu City, Zhejiang Province.  Zhejiang Yongxin subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 12 years from April 18, 2008.
 
Shanghai Fengxian Hog Farm (“Shanghai Fengxian”), a wholly owned subsidiary of Nanchang Best, is located in Yuantong Village, Qianqiao Town, Fengxian District, Shanghai City.  Shanghai Fengxian subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 14 years from May 1, 2008.
 
Shanghai Tuanxi Hog Farm (“Shanghai Tuanxi”), a wholly owned subsidiary of Nanchang Best, is located in Tuanxi Village, Datuan Town, Nanjiang District, Shanghai.  Shanghai Tuanxi subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system. The lease runs for 10 years from May 1, 2008.
 
Shanghai Senrong Hog Farm (“Shanghai Senrong”), a wholly owned subsidiary of Nanchang Best, is located in Wanglong Village, Xinnong Town, Jinshan District, Shanghai.  Shanghai Senrong subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 15 years from May 1, 2008.
 
Fujian Xiamen Muxin Hog Farm (“Fujian Muxin”), a wholly owned subsidiary of Nanchang Best, is located in Tongan District, Xiamen City, Fujian Province.  Fujian Muxin subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.   The lease runs for 10 years from April 30, 2008.
 
Xiamen Yuanshengtai Food Co., Ltd. (“Fujian Yuanshengtai”), a wholly owned subsidiary of Nanchang Best, is located in Xiamen, Fujian Province.  Fujian Yuanshengtai subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 10 years from April 30, 2008.
 
Jiangxi Zhiliang Hog Farm (Jiangxi Zhiliang”), a wholly owned subsidiary of Nanchang Best, is located in Gancaoqian Village, Dayangzhou, Xingan County, Jiangxi Province. Jiangxi Zhiliang subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.   The lease runs for 22 years from April 30, 2008.
 
Shanghai WeiSheng Hog Raising Co., Ltd.(“Shanghai Weisheng”), a wholly owned subsidiary of Nanchang Best, is located in the Jinshan District, Shanghai City.  Shanghai Weisheng subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 30 years from June 1, 2008.
 
Nanping Minkang Hog Farm (“Nanping Minkang”), a wholly owned subsidiary of Shanghai Best, is located in the Fujian Province.  Nanping Minkang subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 15 years from September 17, 2008.
 
Guangdong Lianjiang Xinfa Hog Farm (“Guangdong Xinfa”), a majority owned subsidiary of Guangxi Huijie, is located in Lianjiang City, Guangdong Province.  Guangdong Xinfa subleases the property from the other shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.   The lease runs for 10 years from May 30, 2008.
 
 
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Guangxi Nanning Wanghua Hog Farm (“Guangxi Wanghua”), a wholly owned subsidiary of Guangxi Huijie, is located in Nanning City, Guangxi Province.  Guangxi Wanghua subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.   The lease runs for 10 years from May 30, 2008.
 
Guangxi Linxing Hog Farm (“Guangxi Linxing”), a wholly owned subsidiary of Guangxi Wanghua, is located in Guangxi Province.  Guangxi Linxing subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 10 years from September 20, 2008.
 
Nanning Shunhua Hog Farm Co., Ltd. (“Nanning Shunhua”), a wholly owned subsidiary of Guangxi Wanghua, is located in Guangxi Province.  Nanning Shunhua subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 10 years from October 28, 2008.
 
Nanning Shunan Hog Farm Co., Ltd.(“Nanning Shunan”), a wholly owned subsidiary of Guangxi Wanghua, is located in Guangxi Province.  Nanning Shunan subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 10 years from October 29, 2008.
 
Guangxi Guigang Gangda Hog Farm (“Guangxi Gangda”), a wholly owned subsidiary of Guangxi Huijie, is located in Guigang City, Guangxi Province.  Guangxi Huijie acquired all of the rights to the land, pig houses, office buildings, heating system, power and water supply system in our acquisition of Guangxi Gangda. The right to use the land was granted by Housing Bureau and Land Administration Bureau of Guangxi Province through March 31, 2025
 
Guangxi Gangxuan Hog Farm Co., Ltd. (“Guangxi Gangxuan”), a wholly owned subsidiary of Guangxi Gangda, is located in Guangxi Province.  Guangxi Gangxuan subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system. The lease runs for 11 years from September 20, 2008.
 
Guangxi Xingye Guihong Hog Farm (“Guangxi Guihong”), a wholly owned subsidiary of Guangxi Huijie, is located in Kuiyang Town, Xingye County, Yulin City, Guangxi Province.  Guangxi Huijie acquired all of the rights to the land, pig houses, office buildings, heating system, power and water supply system in our acquisition of Guangxi Guihong. The right to use the land was granted by Housing Bureau and Land Administration Bureau of Guangxi Province through May 30,2025.
 
Hainan Haikou Meilan Hog Farm (“Hainan Meilan”), a wholly owned subsidiary of Guangxi Huijie, is located in Xianlai Village, Dazhipo Town, Haikou City, Hainan Province.  Guangxi Huijie acquired all of the rights to the land, pig houses, office buildings, heating system, power and water supply system in our acquisition of Hainan Meilan.  The right to use the land was granted by Housing Bureau and Land Administration Bureau of Guangxi Province through April 12, 2033.
 
Hainan Haikou Wohao Hog Farm (“Hainan Wohao”), a wholly owned subsidiary of Guangxi Huijie, is located in Fuan Village, Shishan Town, Xiuying District, Haikou City, Hainan Province.  Guangxi Huijie acquired all of the rights to the land, pig houses, office buildings, heating system, power and water supply system in our acquisition of Hainan Wohao. The right to use the land was granted by Housing Bureau and Land Administration Bureau of Guangxi Province through April 18, 2038.
 
Guangxi Guilin Fuzhi Hog Farm (“Guangxi Fuzhi”), a majority owned subsidiary of Guangxi Huijie, is located in Sujia Village, Zhalin Town, Yanshan District, Guilin City, Guangxi Province.  Guanxi Fuzhi subleases the property from the other shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 20 years from May 30, 2008.
 
 
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Best Swine is currently being constructed on land situated in Futian Township, Wuning County, Jiangxi Province.
 
Fujian Jianhua Hog Farm (“Fujian Jianhua”), a wholly owned subsidiary of Best Swine, is located in Xudun Town, Jian’ou City, Fujian Province.  Fujian Jianhua subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 15 years from April 22, 2008.
 
Fujian Fengxiang Agribusiness Co., Ltd. (“Fujian Fengxiang”), a wholly owned subsidiary of Best Swine, is located in Mawei District, Fuzhou City, Fujian Province.  Fujian Fengxiang subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 15 years from April 30, 2008.
 
Nanping Kangda Animal Husbandry Co., Ltd. (“Nanping Kangda”), a wholly owned subsidiary of Best Swine, is located in Yanping District, Nanping City, Fujian Province.  Nanping Kangda subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 15 years from May 27, 2008.
 
Fujian Jianxi Breeder Hog Farm Co., Ltd. (“Fujian Jianxi”), a wholly owned subsidiary of Best Swine, is located in Zhishan District, Jianou City, Fujian Province.  Fujian Jianxi subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 15 years from May 25, 2008.
 
History
 
From incorporation to October 31, 2006, the business of our company, then known as Wallace Mountain Resources Corp., consisted of 18 unit mineral claims known as the South Wallace Mountain Project having a total surface area of approximately 946 acres. At that time the property was without known reserves and the proposed program was exploratory in nature. We paid a $3,000 retainer to the geologist to commence the Phase 1 exploration work on the claim.
 
On October 31, 2006, we entered into and closed a share purchase agreement with Nanchang Best and each of Nanchang Best’s shareholders. Pursuant to this agreement, we acquired all of the issued and outstanding capital stock of Nanchang Best from the Nanchang Best shareholders in exchange for 5,376,000 shares of common stock.
 
Contemporaneously, on October 31, 2006, we entered into and closed a share purchase agreement with Shanghai Best, and each of Shanghai Best’s shareholders. Pursuant to this agreement, we acquire all of the issued and outstanding capital stock of Shanghai Best from the Shanghai Best shareholders in exchange for 1,024,000 shares of common stock.
 
Concurrently with the closing of these transactions and as a condition thereof, we entered into an agreement with Robert Gelfand, our former President and Chief Financial Officer, pursuant to which Mr. Gelfand returned 2,600,000 shares of our common stock to the treasury for cancellation. Mr. Gelfand was not compensated in any way for the cancellation of his shares of our common stock. Upon completion of the foregoing transactions, we had an aggregate of 8,000,000 shares of common stock issued and outstanding. The shares of common stock issued to the shareholders of Nanchang Best and Shanghai Best were issued in reliance upon the exemption from registration provided by Regulation S under the Securities Act of 1933, as amended.
 
Subsequent to the acquisition of Nanchang Best and Shanghai Best, on October 31, 2006, Robert Gelfand resigned as our sole officer and Dr. Songyan Li was appointed as a director. On November 17, 2006, we declared a stock dividend of two additional shares of common stock for each share of common stock outstanding, and changed our name to AgFeed Industries, Inc.
 
 
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On December 20, 2006, we acquired all the outstanding shares of Guangxi Huijie for a total purchase price of 8,600,000 Chinese yuan renminbi ("RMB") (approximately US$1.1 million). We obtained the funds needed to complete this acquisition by borrowing RMB8,600,000 from Sunrise Capital International, Inc. This loan accrued interest at the rate of seven percent per annum and all accrued interest and the principal amount of this loan was due and payable on June 20, 2007. We were permitted to prepay this note without penalty and did so in March 2007. Mr. Sheng Zhou, the brother of our corporate secretary and treasurer, Feng Zhou, is a director of Sunrise Capital, which is owned by his sister-in-law, Ms. Chun Mei Chang.
 
On June 24, 2008, we completed the acquisition of premix feed company HopeJia for a negotiated purchase price of RMB28,600,000 (approximately US$4.2 million).
 
On November 9, 2007, we acquired 90% of the issued and outstanding capital stock of Lushan, a hog breeding operation. The aggregate purchase price was RMB20,112,020, equivalent to approximately US$2.7 million on the date of the transaction. In connection with this transaction, we also assumed and satisfied at closing RMB4,919,980 (approximately US$660,400) of indebtedness owed by Lushan.  The acquisition of Lushan marked our entrance into the hog production business.  Since November 2007, we have acquired 30 operating meat hog producing farms.
 
In January 2008, we acquired at least a majority interest in five additional hog farms.  Specifically:
 
 
·
we acquired 70% of the issued and outstanding capital stock of Wannian on January 3rd for RMB12,250,000 (approximately US$1.7 million); we acquired the remaining 30% equity interest in Wannian on September 8th for RMB6,012,500 (approximately US$0.9 million);
 
 
·
we acquired 70% of the issued and outstanding capital stock of Huyun on January 3rd for RMB6,482,000 (approximately US$0.9 million);
 
 
·
we acquired 60% of the issued and outstanding capital stock of Ganzhou on January 4th for RMB6,480,000 (approximately US$0.9 million);
 
 
·
we acquired all of the hogs and stock of Gang Feng on January 7th for RMB4,820,000 (approximately US$0.7 million); and
 
 
·
we acquired 55% of the issued and outstanding capital stock of Yichun on January 9th for RMB8,855,000 (approximately US$1.2 million).
 
On March 19, 2008, Best Swine was formed as a wholly-owned subsidiary of AgFeed.  Best Swine was incorporated under the laws of the PRC on March 19, 2008 and is being situated in Futian Township, Wuning County, Jiangxi Province, PRC.  Best Swine is being built for the business of raising, breeding and selling hogs for use in PRC’s pork production and hog breeding markets.
 
 
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On April 30, 2008, we acquired all of the equity interest in an additional 16 hog farms.  Specifically, we acquired:
 
Name of Hog Farm
 
Purchase Price in RMB
 
Purchase Price in US$ (1)
         
Guangxi Wanghua
    26,030,000  
$3.7 million
Guangxi Gangda
    14,520,000  
$2.1 million
Guangxi Guihong
    42,500,000  
$6.1 million
Hainan Meilan
    14,700,000  
$2.1 million
Hainan Wohao
    15,200,000  
$2.2 million
Guangxi Fuzhi
    12,000,000  
$1.7 million
Guangdong Xinfa
    11,000,000  
$1.6 million
Zhejiang Yongxin
    10,480,000  
$1.5 million
Shanghai Fengxian
    35,000,000  
$5.0 million
Shanghai Tuanxi
    7,000,000  
$1.0 million
Shanghai Senrong
    30,000,000  
$4.3 million
Fujian Muxin
    29,320,000  
$4.2 million
Fujian Yuanshengtai
    26,200,000  
$3.7 million
Fujian Jianhua
    32,000,000  
$4.6 million
Fujian Fengxiang
    8,100,000  
$1.2 million
Jiangxi Zhiliang
    8,000,000  
$1.1 million

(1)  based on then-current conversion rate
 
On May 28, 2008, we acquired all of the equity interest in Nanping Kangda for RMB5,821,000 (approximately US$0.9 million) and all of the equity interest in Fujian Jianxi for RMB16,338,166 (approximately US$2.4 million).
 
On June 25, 2008, we acquired all of the equity interest in Shanghai Weisheng for RMB12,820,000 (approximately US$1.9 million).
 
In September 2008, we acquired all of the equity interest in three additional hog farms.  Specifically:
 
 
·
we purchased Nanping Minkang for RMB9,865,000 (approximately US$1.4 million) on September 8th; and
 
 
·
we purchased Nanning Shunan for RMB9,256,000 (approximately US$1.4 million) and Guangxi Gangxuan for RMB8,569,000 (approximately US$1.3 million) on September 10th.
 
In October 2008, we acquired all of the equity interest in two more hog farms.  Specifically:
 
 
·
on October 28th, we purchased Guangxi Linxing for RMB7,850,000 (approximately US$1.2 million); and
 
 
·
on October 29th, we purchased Nanning Shunhua for RMB8,260,000 (approximately US$1.2 million).
 
As of December 31, 2008, we held at least a majority interest in 30 Hog Farms and five pre-mix feed operations.
 
 
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Item 1A.  Risk Factors
 
RISK FACTORS
 
Investment in our securities is subject to various risks, including risks and uncertainties inherent in our business.  The following sets forth factors related to our business, operations, financial position or future financial performance or cash flows which could cause an investment in our securities to decline and result in a loss.
 
General Risks Related to Our Business
 
Our success depends on our management team and other key personnel, the loss of any of whom could disrupt our business operations.
 
Our future success will depend in substantial part on the continued service of our senior management and founders. The loss of the services of one or more of our key personnel could impede implementation and execution of our business strategy and result in the failure to reach our goals. We do not carry key person life insurance for any of our officers or employees. Our future success will also depend on the continued ability to attract, retain and motivate highly qualified personnel in the diverse areas required for continuing our operations. The rapid growth of the economy in the PRC has caused intense competition for qualified personnel. We cannot assure you that we will be able to retain our key personnel or that we will be able to attract, train or retain qualified personnel in the future.
 
We need to successfully integrate our acquired businesses.
 
We have made 30 acquisitions since entering the hog farm business in November 2007. Prior to that time, we had limited experience in growth through acquisition. Our future financial results depend upon our ability to successfully integrate the acquired businesses.  We also face pressure to adequately conduct our ongoing operations while working toward the integration of these businesses. While we are pleased with the progress of our integration efforts to date, there is no assurance that we will be able to complete the integration of the acquired businesses as projected or without disrupting other areas of our business that could have a negative effect on our future financial results.
 
Our acquisition strategy involves a number of risks. Even when an acquisition is completed, we may have integration issues that may not produce results as positive as management may have projected.
 
While we are taking a break from our acquisition program as we focus on integrating the companies we have acquired and increasing the efficiencies of our existing businesses,  we intend to grow through additional acquisitions in the future. Acquisitions involve a number of special risks, including:
 
 
·
failure of the acquired business to achieve expected results;
 
 
·
diversion of management’s attention;
 
 
·
failure to retain key personnel of the acquired business;
 
 
·
additional financing, if necessary and available, could increase leverage, dilute equity, or both;
 
 
·
the potential negative effect on our financial statements from the increase in goodwill and other intangibles; and
 
 
·
the high cost and expenses of completing acquisitions and risks associated with unanticipated events or liabilities.
 
 
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These risks could have a material adverse effect on our business, results of operations and financial condition.  In addition, our ability to further expand our operations through acquisitions may be dependent on our ability to obtain sufficient working capital, either through cash flows generated through operations or financing activities or both.  There can be no assurance that we will be able to obtain any additional financing on terms that are acceptable to us, or at all.
 
Even though we have curtailed our aggressive acquisition of established farms, we expect to face increased competition for acquisition candidates. We cannot guarantee that we will be able to identify, acquire, or manage profitably additional businesses in the event that we resume our acquisition program. In future acquisitions, we also could incur additional indebtedness or pay consideration in excess of fair value, which could have a material adverse effect on our business, results of operations and financial condition. In addition, we may inadvertently assume unknown liabilities in acquisitions that we complete. Assumption of unknown liabilities in acquisitions may harm our financial condition and operating results. Acquisitions may be structured in such a manner that would result in the assumption of unknown liabilities not disclosed by the seller or uncovered during pre-acquisition due diligence. These obligations and liabilities could harm our financial condition and operating results.
 
Volatile energy prices could adversely affect our operating results.
 
In the last few years, energy prices have risen dramatically and are now volatile, which has resulted in increased and unpredictable costs for our businesses and raw materials costs for our branded feed products. Rising energy prices could adversely affect demand for our feed products and increase our operating costs, both of which would reduce our sales and operating income.
 
We face risks associated with currency exchange rate fluctuations; any adverse fluctuation may adversely affect our operating margins
 
Almost all of our revenues are denominated in Renminbi. Conducting business in currencies other than US dollars subjects us to fluctuations in currency exchange rates that could have a negative impact on our reported operating results. Fluctuations in the value of the US dollar relative to other currencies impact our revenues, cost of revenues and operating margins and result in foreign currency translation gains and losses. If the exchange rate of the Renminbi is affected by lowering its value as against the US dollar, our reported profitability when stated in US dollars will decrease. Historically, we have not engaged in exchange rate hedging activities and have no current intention of doing so.
 
Risks Related to Our Feed Business
 
We cannot be certain that our feed product innovations and marketing successes will continue.
 
We believe that our past performance has been based on, and our future success will depend upon, in part, our ability to continue to improve our existing feed products through product innovation and to develop, market and produce new feed products. We cannot assure you that we will be successful in introducing, marketing and producing any new feed products or feed product innovations, or that we will develop and introduce in a timely manner innovations to our existing feed products which satisfy customer needs or achieve market acceptance. Our failure to develop new feed products and introduce them successfully and in a timely manner could harm our ability to grow our business and could have a material adverse effect on our business, results of operations and financial condition.
 
We rely on independently owned wholesale distributors who do not exclusively offer our feed products to their customers.
 
The loss of, or significant adverse change in, our relationship with any of our key wholesale distributors of our feed products could cause our net sales, income from operations and cash flow to decline. The loss of, or reduction in, orders from any significant customer, losses arising from customer disputes regarding shipments, fees, merchandise condition or related matters, or our inability to collect accounts receivable from any major customer could reduce our income from operations and cash flow.
 
 
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We may not be able to reach our revenue and net income targets due to unpredictable market conditions.
 
The primary end-user customers for our feed products are commercial hog farms, individual farmers and slaughterhouses. Although hog prices in the PRC reached multi-year highs last year, hog prices declined during the last six months of 2008 as China substantially increased its imports of pork products. In addition, the price for corn, an important element in feed, has been volatile. A combination of lower hog sale prices and higher feed costs could constrain demand for our feed products.
 
We are a major purchaser of many commodities that we use for raw materials and packaging, and price changes for the commodities we depend on may adversely affect our profitability.
 
We enter into contracts for the purchase of raw materials at fixed prices, which are designed to protect us against raw material price increases during their term. However, when necessary, we attempt to recover our commodity cost increases by increasing prices, promoting a higher-margin product mix and creating additional operating efficiencies. Nevertheless, the raw materials used in our feed business are largely commodities that experience price fluctuations caused by external conditions and changes in governmental agricultural programs.  We also use paper products, such as corrugated cardboard, aluminum products, films and plastics to package our feed products. Substantial increases in the prices of packaging materials or higher prices of our raw materials could adversely affect our operating performance and financial results. Commodity price changes may result in unexpected increases in raw material and packaging costs, and we may be unable to increase our prices to offset these increased costs without suffering reduced volume, revenue and income. Any substantial fluctuation in the prices of raw materials, if not offset by increases in our sales prices, could adversely affect our profitability.
 
Outbreaks of livestock disease can adversely affect sales of our products.
 
Outbreaks of livestock diseases can significantly affect demand for our feed products. An outbreak of disease could result in governmental restrictions on the sale of livestock products to or from customers, or require our customers to destroy their flocks. This could result in the cancellation of orders of feed products by our customers and create adverse publicity that may have a material adverse effect on the agricultural products industry and our ability to market our products successfully.
 
Our products and processes can expose us to product liability claims.
 
Product liability claims or product recalls can adversely affect our business reputation and expose us to increased scrutiny by local, provincial, and central governmental regulators. The packaging, marketing and distribution of agricultural feed products entail an inherent risk of product liability and product recall and the resultant adverse publicity. We may be subject to significant liability if the consumption of any of our products causes injury, illness or death of livestock, other animals or humans. We could be required to recall certain of our feed products in the event of contamination or damage to the products. In addition to the risks of product liability or product recall due to deficiencies caused by our production or processing operations, we may encounter the same risks if any third party tampers with our feed products. We cannot assure you that we will not be required to perform product recalls, or that product liability claims will not be asserted against us in the future. Any claims that may be made may create adverse publicity that would have a material adverse effect on our ability to market our feed products successfully or on our business, reputation, prospects, financial condition and results of operations. A successful product liability claim in excess of our insurance coverage could have a material adverse effect on us and could prevent us from obtaining adequate product liability insurance in the future on commercially reasonable terms.
 
 
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We may not be able to obtain regulatory approvals for our feed products.
 
The manufacture and sale of agricultural products in the PRC is regulated by the central government and the local provincial governments. Although our licenses and regulatory filings are current, the uncertain legal environment in the PRC and within our industry may make us vulnerable to local government agencies or other parties who wish to renegotiate the terms and conditions of, or terminate their agreements or other understandings with us.
 
We require various licenses and permits to operate our business, and the loss of or failure to renew any or all of those licenses and permits could require us to suspend some or all of our production or distribution operations.
 
In accordance with the laws and regulations of the PRC, we are required to maintain various licenses and permits in order to operate our feed business.  We are required to comply with applicable hygiene and food safety standards in relation to our feed production processes.  Our premises and transportation vehicles are subject to regular inspections by the regulatory authorities for compliance with applicable regulations.  Failure to pass these inspections, or the loss of or failure to renew our licenses and permits, could require us to temporarily or permanently suspend some or all of our feed production or distribution operations, which could disrupt our operations and adversely affect our revenues and profitability.
 
We face significant competition in the sales of our agricultural feed products.
 
Competition in the agricultural feed industry, especially with companies with greater resources, may make us unable to compete successfully in these industries, which could adversely affect our business.
 
In general, the competitive factors in the agricultural feed industry in the PRC include:
 
 
·
price;
 
·
product quality;
 
·
brand identification;
 
·
breadth of product line; and
 
·
customer service.
 
To the extent that our products and services do not exhibit these qualities, our ability to compete will be hindered.
 
Concerns with the safety and quality of agricultural feed products could cause customers to avoid our products.
 
We could be adversely affected if our customers and the ultimate consumers of our feed products lose confidence in the safety and quality of various feed products. Adverse publicity about these types of concerns, such as the recent publicity concerning the use of the substance melamine in milk and infant formula, may discourage our customers from buying our products or cause production and delivery disruptions. Any negative change in customer perceptions about the safety and quality of our feed products could adversely affect our business and financial condition.
 
 
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If our feed products become adulterated or misbranded, we would need to recall those items and may experience product liability claims if consumers are injured as a result.
 
Animal feed products occasionally contain contaminants due to inherent defects in those products or improper storage or handling. Under adverse circumstances, animal feed manufacturers may need to recall some of their products if they become adulterated or misbranded, and may also be liable if the consumption of any of their products causes injury.  While we have never been required to recall any of our feed products and we maintain insurance that we believe is adequate to cover this type of loss, a widespread product recall could result in changes to one or more of our business processes, product shortages, loss of customer confidence in our food or other adverse effects on our business.  If we are required to defend against a product liability claim, whether or not we are found liable under the claim, we could incur substantial costs, our reputation could suffer and our customers might substantially reduce their existing or future orders from us.
 
We may not be able to adequately protect and maintain our intellectual property, trademark, and brand names.
 
Our success will depend on our ability to continue to develop and market fodder and blended feed products. We currently have not applied for patents for our products or formulas, as our management believes an application for such patents would result in public knowledge of our proprietary technology and formulas. Since we do not have patent protection for our technology or formulas, we may not be able to protect our rights to this intellectual property if our competitors discover or illegally obtain this technology or formulas. Our inability to protect our rights to this intellectual property may adversely affect our ability to prevent competitors from using our products and developments.
 
Some of our significant customer and supplier contracts are short-term.
 
Some of our feed customers and suppliers operate through purchase orders or short-term contracts. Although we have long-term business relationships with many of our feed customers and suppliers and alternative sources of supply for key items, we cannot be sure that any of these customers or suppliers will continue to do business with us on the same basis. Additionally, although we will try to renew these contracts as they expire, there can be no assurance that these customers or suppliers will renew these contracts on terms that are favorable to us, if at all. The termination of or modification to any number of these contracts may adversely affect our business and prospects, including our financial performance and results of operations.
 
Risks Related to Our Hog Farming Business
 
Our limited operating history in hog farming makes it difficult to evaluate our future prospects and results of operations.
 
We have a limited operating history in the hog farming business.  While we are a leader in the feed product industry, the current management team does not have the same depth of experience in the hog farming business.  Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early stage companies in evolving markets such as the market for breeding and selling hogs in the PRC.  Some of these risks and uncertainties relate to our ability to:
 
 
·
attract additional customers and increase spending per customer;
 
·
increase awareness of our brand and continue to develop customer loyalty in the hog farming line of business;
 
·
respond to competitive market conditions;
 
·
respond to changes in our regulatory environment;
 
·
maintain effective control of our costs and expenses;
 
·
raise sufficient capital to sustain and expand our business; and
 
·
attract, retain and motivate qualified personnel.
 
If we are unsuccessful in addressing any of these risks and uncertainties, our business may be materially and adversely affected.
 
 
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Health risks to hogs and quality concerns could adversely affect production and our business.
 
We take precautions to ensure that our hogs are healthy. Nevertheless, we are subject to risks relating to our ability to maintain animal health and control diseases.  Disease can reduce the number of offspring produced, hamper the growth of the hogs to finished size and require in some cases the destruction of infected hogs, all of which could adversely affect our ability sell our hogs.  Adverse publicity concerning any disease or heath concern could also cause customers to lose confidence in the safety and quality of our hogs.  For example, blue ear disease, or PRRS, could result in significant loss in production of hogs.  The PRC lost over 10 million pigs to PRRS in 2006 and 2007.  Additionally, since our hogs will be fed almost exclusively with our feed products, safety and quality concerns over our feed products will also adversely affect the sales of our hogs.
 
We may not be able to maintain the necessary hog farming licenses.
 
Hog breeding is subject to substantial licensing requirements and regulation.  In order to sell breeder hogs in the PRC a breeder hog farm must be awarded a breeder’s license by the local government authorities.  Only those breeder hog farms that have qualified staff, specialized equipment and are in segregated locations to avoid the spread of disease are eligible for licensing.  Meat hog farms do not require a license.  Currently, we have obtained a license to own and operate Lushan, our only breeder hog farm.  We need to maintain the licenses we have and, if we pursue acquisitions of other breeder hog farms, we will need to obtain additional licenses to operate those farms. Our future success in the hog farming industry depends on our ability to acquire such licenses and permits to expand our business.
 
Our hog farming business could be adversely affected by fluctuations in pork and commodity prices.
 
The price at which we sell our hogs is directly affected by the supply and demand for pork products and other proteins in the PRC, all of which are determined by the constantly changing market forces of supply and demand as well as other factors over which we have little or no control.  A downward fluctuation in the demand for pork may adversely impact our quarterly and annual results of operations for the hog farming business. Although hog prices in the PRC reached multi-year highs last year, hog prices declined during the last six months of 2008 as China substantially increased its imports of pork products. In addition, the price for corn, an important element in feed, has been volatile. Lower hog sale prices, higher feed costs, or both would have a negative effect on our results of operations.
 
Risks Related to Conducting Our Business in China
 
We are subject to economic and political risks in China over which we have little or no control, and may be unable to alter our business practice in time to avoid the possibility of reduced revenues.
 
All of our business is conducted in China. Doing business outside the United States, and particularly in China, subjects us to various risks and uncertainties, including changing economic and political conditions, major work stoppages, exchange rate controls, currency fluctuations, armed conflicts and unexpected changes in United States and foreign laws relating to tariffs, trade restrictions, transportation regulations, foreign investments and taxation. We have no control over most of these risks and may be unable to anticipate changes in international economic and political conditions. Therefore, we may be unable to alter our business practice in time to avoid the possibility of reduced revenues.
 
 
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China’s economic policies could affect our business.
 
All of our assets are located in China and all of our revenue is derived from our operations in China. Accordingly, our results of operations and prospects are subject, to a significant extent, to the economic, political and legal developments in China.  While China’s economy has experienced significant growth in the past twenty years, such growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall economy of the PRC, but they may also have a negative effect on us. For example, our operating results and financial condition may be adversely affected by the government control over capital investments or changes in tax regulations. The economy of the PRC has been changing from a planned economy to a more market-oriented economy. In recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform and the reduction of state ownership of productive assets, and the establishment of corporate governance in business enterprises. However, a substantial portion of productive assets in the PRC are still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over the PRC’s economic growth through the allocation of resources, the control of payment of foreign currency-denominated obligations, the setting of monetary policy and the provision of preferential treatment to particular industries or companies.
 
If the Chinese government finds that the structure for operating our Chinese businesses do not comply with Chinese governmental restrictions on foreign investment, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.>
 
All of our operations are conducted through our subsidiaries in China. If we, our subsidiaries, or our corporate structure is found to be in violation of any existing or future PRC laws or regulations (for example, if we are deemed to be holding equity interests in an entity in which direct foreign ownership is restricted) the relevant PRC regulatory authorities, including the administration of industry and commerce, the administration of foreign exchange and relevant agencies of the Ministry of Commerce, would have broad discretion in dealing with such violations, including:
 
 
·
revoking business and operating licenses
 
·
confiscating income and imposing fines and other penalties
 
·
requiring us to restructure our corporate structure or operations
 
·
restricting or prohibiting our use of proceeds from our financings to finance our business and operations in China
 
·
imposing conditions with which we or our subsidiaries may not be able to comply
 
·
forcing us to relinquish our interests in our subsidiaries
 
The imposition of any of these penalties could result in a material and adverse effect on our ability to conduct our business.
 
We may have difficulty establishing adequate management, legal and financial controls in China.
 
China historically has not adopted a Western style of management, financial reporting concepts and practices, modern banking, computer or other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in China. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, and instituting business practices that meet Western standards. We may also experience difficulty in collecting financial data and preparing financial statements, books of account and corporate records.
 
Our bank accounts are not insured or protected against loss.
 
We maintain our cash with various banks and trust companies located in China. Our cash accounts are not insured or otherwise protected. Should any bank or trust company holding our cash deposits become insolvent, or if we are otherwise unable to withdraw funds, we would lose the cash on deposit with that particular bank or trust company.
 
 
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As we have limited business insurance coverage in China, any loss which we suffer may not be insured or may be insured to only a limited extent.
 
The insurance industry in China is still in an early stage of development and insurance companies located in China offer limited business insurance products. In the event of damage or loss to our properties, our insurance may not provide as much coverage as if we were insured by insurance companies in the United States.
 
Tax laws and regulations in China are subject to substantial revision, some of which may adversely affect our profitability
 
The Chinese tax system is in a state of flux, and it is anticipated that China's tax regime will be altered in the coming years. Tax benefits that we presently enjoy may not be available in the wake of these changes, and we could incur tax obligations to our government that are significantly higher than anticipated. These increased tax obligations could negatively impact our financial condition and our revenues, gross margins, profitability and results of operations may be adversely affected as a result.
 
We may face judicial corruption in China.
 
Another obstacle to foreign investment in China is corruption. There is no assurance that we will be able to obtain recourse in any legal disputes with suppliers, customers or other parties with whom we conduct business, if desired, through China’s poorly developed and sometimes corrupt judicial systems.
 
We may face obstacles from the communist system in China.
 
Foreign companies conducting operations in China face significant political, economic and legal risks. The Communist regime in China, including a cumbersome bureaucracy, may hinder Western investment.
 
If relations between the United States and China worsen, investors may be unwilling to hold or buy our stock and our stock price may decrease.
 
At various times during recent years, the United States and China have had significant disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and China, whether or not directly related to our business, could reduce the price of our common stock.
 
The government of China could change its policies toward private enterprise or even nationalize or expropriate private enterprises, which could result in the total loss of our and your investment.
 
Our business is subject to significant political and economic uncertainties and may be affected by political, economic and social developments in China. Over the past several years, the government of China has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization. The government of China may not continue to pursue these policies or may significantly alter them to our detriment from time to time with little, if any, prior notice.
 
Changes in policies, laws and regulations or in their interpretations or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to shareholders, or devaluations of currency could cause a decline in the price of our common stock, should a market for our common stock ever develop. Nationalization or expropriation could even result in the total loss of your investment.
 
 
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The nature and application of many laws of China create an uncertain environment for business operations and they could have a negative effect on us.
 
The legal system in China is a civil law system. Unlike the common law system, the civil law system is based on written statutes where decided legal cases have little value as precedents. In 1979, China began to promulgate a comprehensive system of laws and has since introduced many laws and regulations to provide general guidance on economic and business practices in China and to regulate foreign investment. Progress has been made in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. The promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could cause a decline in the price of our common stock. In addition, as these laws, regulations and legal requirements are relatively recent, their interpretation and enforcement involve significant uncertainty.
 
Limitations on the ability of our operating subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business and fund our operations
 
We are a holding company and conduct substantially all of our business through our operating subsidiaries in China. We will of necessity rely on dividends paid by our subsidiaries for our cash needs, including the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities organized in China is subject to limitations. In particular, regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with Chinese accounting standards and regulations. Our Chinese subsidiaries are also required to set aside at least 10% of their after-tax profit based on Chinese accounting standards each year to its general reserves until the accumulative amount of such reserves reaches 50% of their registered capital. These reserves are not distributable as cash dividends. In addition, they are required to allocate a portion of its after-tax profit to its staff welfare and bonus fund at the discretion of its board of directors. Moreover, if our subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. Any limitation on the ability of our subsidiaries to distribute dividends and other distributions to us could materially and adversely limit our ability to make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.
 
Recent Chinese regulations relating to the establishment of offshore special purpose companies by Chinese residents and registration requirements for employee stock ownership plans or share option plans may subject our China resident shareholders to personal liability and limit our ability to acquire Chinese companies or to inject capital into our operating subsidiaries in China, limit our subsidiaries’ ability to distribute profits to us, or otherwise materially and adversely affect us.
 
The State Administration of Foreign Exchange (SAFE) issued a public notice in October 2005, requiring PRC residents, including both legal persons and natural persons, to register with the competent local SAFE branch before establishing or controlling any company outside of China, referred to as an “offshore special purpose company,” for the purpose of acquiring any assets of or equity interest in PRC companies and raising funds from overseas. In addition, any PRC resident that is the shareholder of an offshore special purpose company is required to amend his or her SAFE registration with the local SAFE branch, with respect to that offshore special purpose company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in China. To further clarify the implementation of Circular 75, the SAFE issued Circular 124 and Circular 106 on November 24, 2005 and May 29, 2007, respectively. Under Circular 106, PRC subsidiaries of an offshore special purpose company are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s shareholders who are PRC residents in a timely manner. If these shareholders fail to comply, the PRC subsidiaries are required to report to the local SAFE authorities. If the PRC subsidiaries of the offshore parent company do not report to the local SAFE authorities, they may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to their offshore parent company and the offshore parent company may be restricted in its ability to contribute additional capital into its PRC subsidiaries. Moreover, failure to comply with the above SAFE registration requirements could result in liabilities under PRC laws for evasion of foreign exchange restrictions. Some of our PRC resident beneficial owners have not registered with the local SAFE branch as required under SAFE regulations. The failure or inability of these PRC resident beneficial owners to comply with the applicable SAFE registration requirements may subject these beneficial owners or us to fines, legal sanctions and restrictions described above.
 
 
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On March 28, 2007, SAFE released detailed registration procedures for employee stock ownership plans or share option plans to be established by overseas listed companies and for individual plan participants. Any failure to comply with the relevant registration procedures may affect the effectiveness of our employee stock ownership plans or share option plans and subject the plan participants, the companies offering the plans or the relevant intermediaries, as the case may be, to penalties under PRC foreign exchange regime. These penalties may subject us to fines and legal sanctions, prevent us from being able to make distributions or pay dividends, as a result of which our business operations and our ability to distribute profits to you could be materially and adversely affected.
 
In addition, the National Development and Reform Commission ("NDRC") promulgated a rule in October 2004, or the NDRC Rule, which requires NDRC approvals for overseas investment projects made by PRC entities. The NDRC Rule also provides that approval procedures for overseas investment projects of PRC individuals must be implemented with reference to this rule. However, there exist extensive uncertainties in terms of interpretation of the NDRC Rule with respect to its application to a PRC individual’s overseas investment, and in practice, we are not aware of any precedents that a PRC individual’s overseas investment has been approved by the NDRC or challenged by the NDRC based on the absence of NDRC approval. Our current beneficial owners who are PRC individuals did not apply for NDRC approval for investment in us. We cannot predict how and to what extent this will affect our business operations or future strategy. For example, the failure of our shareholders who are PRC individuals to comply with the NDRC Rule may subject these persons or our PRC subsidiary to certain liabilities under PRC laws, which could adversely affect our business.
 
Restrictions on currency exchange may limit our ability to utilize our revenues effectively.>
 
The Chinese government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive all of our revenues in RMB. Under our current structure, our income is primarily derived from dividend payments from our subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB are to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The Chinese government may also, at its discretion, restrict access in the future to foreign currencies for current account transactions. Since our revenues are denominated in RMBs, any existing and future restrictions on currency exchange may limit our ability to utilize revenues to fund business activities outside of China that require foreign currencies.
 
Recent changes in China’s currency policies may cause a target business’s ability to succeed in the international markets to be diminished.
 
Historically, China “pegged” its currency to the U.S. dollar. This meant that each unit of PRC currency had a set ratio for which it could be exchanged for United States currency, as opposed to having a floating value like other countries’ currencies. Many countries argued that this system of keeping China currency low when compared to other countries gave PRC companies an unfair price advantage over foreign companies. Due to mounting pressure from outside countries, China recently reformed its economic policies to establish a floating value. As a result of this policy reform, we may be adversely affected since the competitive advantages that existed as a result of the former policies will cease. We cannot assure you that we will be able to compete effectively with the new policies in place.
 
 
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If any dividend is declared in the future and paid in a foreign currency, you may be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.
 
If you are a United States holder, you will be taxed on the U.S. dollar value of your dividends, if any, at the time you receive them, even if you actually receive a smaller amount of U.S. dollars when the payment is in fact converted into U.S. dollars. Specifically, if a dividend is declared and paid in a foreign currency, the amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign currency, determined at the spot rate of the foreign currency to the U.S. dollar on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Thus, if the value of the foreign currency decreases before you actually convert the currency into U.S. dollars, you will be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.
 
The admission of China into the World Trade Organization could lead to increased foreign competition for us.
 
Domestic competition in the animal feed industry is largely fragmented and foreign competition is minimal. However, as a result of China becoming a member of the World Trade Organization (“WTO”), import restrictions on agricultural products are expected to be reduced. The lowering of import restrictions and the WTO’s requirement for a reduction of import tariffs as a condition of membership may result in an increase of foreign products, and could in turn lead to increased competition in the domestic agricultural market.
 
Risks Related to our Securities
 
It will be extremely difficult to acquire jurisdiction and enforce liabilities against our officers, directors and assets based in China.
 
As our executive officers and several of our directors, including the chairman of our Board of Directors, are Chinese citizens, it may be difficult, if not impossible, to acquire jurisdiction over these persons in the event a lawsuit is initiated against us and/or our officers and directors by a shareholder or group of shareholders in the United States. Also, because our operating subsidiaries and assets are located in China, it may be extremely difficult or impossible for investors to access those assets to enforce judgments rendered against us or our directors or executive officers by United States courts. In addition, the courts in China may not permit the enforcement of judgments arising out of United States federal and state corporate, securities or similar laws. Accordingly, United States investors may not be able to enforce judgments against us for violation of United States securities laws.
 
Our common stock price is subject to significant volatility, which could result in substantial losses for investors.
 
During the eight month period ended August 28, 2007, the high and low bid prices of our common stock on the Over-The-Counter Bulletin Board (“OTCBB”) were $8.25 per share and $1.85 per share, respectively.  Since our commencement of trading on the Nasdaq Stock Market on August 29, 2007 through March 10, 2009, the high and low sales prices of our common stock were $21.3099 and $0.90.  Prices for our shares are determined in the marketplace and may accordingly be influenced by many factors, including, but not limited to:
 
 
·
the depth and liquidity of the market for the shares;
 
·
quarter-to-quarter variations in our operating results;
 
·
announcements about our performance as well as the announcements of our competitors about the performance of their businesses;

 
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·
investors’ evaluations of our future prospects and the food industry generally;
 
·
changes in earnings estimates by, or failure to meet the expectations of, securities analysts;
 
·
our dividend policy; and
 
·
general economic and market conditions.
 
In addition, the stock market often experiences significant price fluctuations that are unrelated to the operating performance of the specific companies whose stock is traded. These market fluctuations could adversely affect the trading price of our shares.
 
The price at which investors purchase shares of our common stock may not be indicative of the price that will prevail in the trading market. Investors may be unable to sell their shares of common stock at or above their purchase price, which may result in substantial losses.
 
Future sales of shares of our common stock by our shareholders could cause our stock price to decline.
 
We cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of common stock for sale will have on the market price prevailing from time to time.  As of March 10, 2009, we had outstanding 38,300,436 shares of common stock.  An aggregate of 3,880,004 shares of our common stock are issuable upon conversion of our outstanding convertible notes or upon exercise of our outstanding warrants and an aggregate of 180,000 shares of our common stock are issuable upon exercise of our outstanding options.  Sales of shares of our common stock in the public market covered under an effective registration statement, or pursuant to Rule 144, or the perception that those sales may occur, could cause the trading price of our common stock to decrease or to be lower than it might be in the absence of those sales or perceptions.
 
We may issue additional shares of our capital stock or debt securities to raise capital or complete acquisitions, which would reduce the percentage equity interest of our shareholders.
 
Our certificate of incorporation authorizes the issuance of up to 75,000,000 shares of common stock, par value $0.001 per share.  As of March 10, 2009, there were approximately 32,639,560 authorized and unissued shares of our common stock which have not been reserved and accordingly, are available for future issuance. Although we have not entered into any agreements as of this date to issue our unreserved shares of common stock, we may issue a substantial number of additional shares of our common stock to complete a business combination or to raise capital in the private or public markets. The issuance of additional shares of our common stock:
 
 
·
may significantly reduce the equity interest of investors in this offering; and
 
 
·
may adversely affect prevailing market prices for our common stock.
 
The elimination of monetary liability against our directors, officers and employees under Nevada law and the existence of indemnification rights to our directors, officers and employees may cause us to incur substantial expenditures and may discourage lawsuits against our directors, officers and employees.
 
Our articles of incorporation contain specific provisions that eliminate the liability of our directors for monetary damages to our company and shareholders, to the extent provided by Nevada law. We may also have or may create contractual indemnification obligations under our employment agreements with our officers. The foregoing indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit our company and shareholders.
 
 
28

 

Our management owns a significant amount of our common stock, giving them influence or control in corporate transactions and other matters, and their interests could differ from those of other shareholders.
 
Our principal executive officers and directors beneficially own approximately 37.61% of our outstanding common stock. As a result, they are in a position to significantly influence the outcome of matters requiring a shareholder vote, including the election of directors, the adoption of any amendment to our articles of incorporation or bylaws, and the approval of significant corporate transactions. Their control may delay or prevent a change of control on, terms favorable to our other shareholders and may adversely affect your voting and other shareholders rights.
 
Our articles of incorporation, our bylaws and provisions of Nevada law could make it more difficult for a third party to acquire us, even if doing so could be in our shareholders’ best interest.
 
Provisions of our articles of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so might be in the best interest of our shareholders. It could be difficult for a potential bidder to acquire us because our articles of incorporation and bylaws contain provisions that may discourage takeover attempts. These provisions may limit shareholders’ ability to approve a transaction that shareholders may think is in their best interests. These provisions include a requirement that certain procedures must be followed before matters can be proposed for consideration at meetings of our shareholders.
 
Provisions of Nevada’s business combinations statute also restrict certain business combinations with interested shareholders. We have elected not to be governed by these provisions in our amended and restated articles of incorporation. However, this election may not be effective unless we meet certain conditions under the Nevada statute.
 
Capital outflow policies in China may hamper our ability to declare and pay dividends to our shareholders.
 
The PRC has adopted currency and capital transfer regulations. These regulations may require us to comply with complex regulations for the movement of capital. Although our management believes that we will be in compliance with these regulations, should these regulations or the interpretation of them by courts or regulatory agencies change, we may not be able to pay dividends to our shareholders outside of China. In addition, under current Chinese law, we must retain a reserve equal to 10 percent of net income after taxes, not to exceed 50 percent of registered capital. Accordingly, this reserve will not be available to be distributed as dividends to our shareholders. We presently do not intend to pay dividends in the foreseeable future. Our management intends to follow a policy of retaining all of our earnings to finance the development and execution of our strategy and the expansion of our business.
 
We have agreed with the staff of Nasdaq to seek shareholder ratification of the issuance of our securities in our December 2008 financing.
 
By letter dated February 27, 2009 to the staff of The NASDAQ Stock Market, we agreed to seek shareholder ratification at its upcoming annual meeting of shareholders for the issuance of common stock and warrants in the Company's registered direct offering on December 31, 2008. In the letter and subsequent conversations with the staff of NASDAQ, we also agreed to not effect exercises of the warrants prior to obtaining shareholder ratification of the issuance. We plan to seek shareholder ratification at our upcoming annual meeting of shareholders, which we plan to hold on June 11, 2009, well before the date the warrants become exercisable.
 
 
29

 

On December 31, 2008, we issued 5,000,006 shares of our common stock and warrants to purchase 3,500,000 shares of our common stock for aggregate gross proceeds of approximately $8,750,000. The sales were made under our shelf registration statement to four institutional investors. Nasdaq Marketplace Rule 4350(i)(1)(D)(ii) requires shareholder approval for the issuance of common stock or securities exercisable for common stock equal to 20% or more of the common stock outstanding before the issuance for less than the greater of book or market value of the stock. The shares of common stock were sold at a discount to market price, but only represented approximately 15.2% of our outstanding common stock prior to the sale, well below the 20% limit of Marketplace Rule 4350(i)(1)(D)(ii). However, the shares of our common stock issuable upon exercise of the warrants represented approximately 10.6% of our common stock prior to the sale. While the $2.50 exercise price of the warrants was greater than the market price of our common stock at the time of the sale, it was less the book value of our shares as of September 30, 2008.
 
Members of the Company's management having the right to vote 11,460,024 shares of the Company's common stock (representing approximately 35% of the outstanding common stock prior to the completion of the offering) have agreed to vote in favor of the ratification. The ratification will be approved if a majority of the votes cast on the ratification proposal at the annual meeting vote to approve it, not counting any votes represented by the shares of common stock issued in the offering.
 
If our stockholders do not ratify the issuance, the securities will remain duly issued and outstanding and the warrants will remain obligations of the Company
 
However, in the event that our stockholders do not ratify the issuance of these securities, Nasdaq may take formal action with respect to our issuance of the common stock and warrants, which could include a public reprimand of the Company and/or delisting our shares from the Nasdaq Global Market.
 
Risk Associated with the Global Economy
 
Deterioration of economic conditions could negatively impact our business.>
 
Our business may be adversely affected by changes in global economic conditions, including inflation, interest rates, availability of capital markets, consumer spending rates, energy availability and costs (including fuel surcharges) and the effects of governmental initiatives to manage economic conditions. Any such changes could adversely affect the demand for our products or the cost and availability of our needed raw materials, thereby negatively affecting our financial results.
 
The recent disruptions in credit and other financial markets and deterioration of global economic conditions, could, among other things:
 
 
·
make it more difficult or costly for us to obtain financing for our operations or investments or to finance debt in the future;
 
 
·
impair the financial condition of some of our customers, suppliers or counterparties to our derivative instruments, thereby increasing bad debts or non-performance by suppliers; and
 
 
·
negatively impact demand for pre-mix feed or hog products, which could result in a reduction of sales, operating income and cash flows.
 
Item 1B.  Unresolved Staff Comments.
 
None
 
Item 2.  Properties.
 
We lease our headquarters office, located at at Rm. A1001-1002, Tower 16, Hengmao Int'l Center, 333 S. Guangchang Rd., Nanchang, Jiangxi Province, PRC 330003.  The annual rent on this space is approximately $28,000 and the lease runs for two years through April 28, 2010.
 
 
30

 

Nanchang Best is located in Chang Bei District Industrial Park, in Nanchang, Jiangxi Province.  It owns three buildings consisting of an office building, a factory and a dormitory.  Nanchang Best has been granted the right to use the land in Nanchang by the Municipal Administration of state-owned land through December 2049.  Nanchang Best also leases a feed manufacturing facility at No. 4 Chuangye Street, East New Area, in the city of Taian, Shandong Province.  The facility consists of four buildings, one each for manufacturing, offices, warehouse and dormitory facilities. Nanchang Best has been granted the right to use the land in Shandong by the Shandong Provisional Government through July 2052.
 
Shanghai Best is located in Nanxiang, Jia Ding District, Shanghai.  It rents to workshop buildings and office space in which it conducts all manufacturing and business operations.  The annual rent on the Shanghai property is approximately $33,000 and the lease runs through September 2009.
 
Guangxi Huijie is located in Coastal Industrial Park, Liangqin District, Nanning City, Guangxi Province.  Guangxi Huijie owns three buildings, an office building, a production plant and a worker dormitory.  The right to use the land was granted by the Housing Bureau and Land Administrative Bureau of Langqin District, Nanning City through October 2056.
 
Shandong Feed is located at No. 4 Chuangye Street, East New Area, in the city of Taian, Shandong Province.  This facility consists of four buildings, one each for manufacturing, offices, warehouse and dormitory facilities. Shandong Feed has been granted the right to use this land by the Shandong Provisional Government through July 2052.
 
HopeJia is located on South Wuting Road, Laocheng Development Zone, Chengmai County, Hainan Province.  HopeJia owns three buildings, an office building, production plant and a worker dormitory. The right to use the land was granted by Housing Bureau and Land Administration Bureau of Hainan Province through January 2056.
 
Lushan’s primary facility is a breeder hog farm located in the town of Hualin in Xingzi County, Jiangxi Province.  The facility, which is situated on 258,000 square meters of developed land, is leased from the Chinese government for a period of 29 years and is scheduled to expire on April 13, 2034. Lushan’s breeder hog farm contains two separated areas, one for sows and the other for boars and gilts, with a total of 15,800 square meters of buildings.  Lushan pays a nominal annual rent under the terms of the lease.
 
Wannian is located in Nanyan village in the town of Peimei in Wannian county, Jiangxi Province.  Wannian subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.   The lease runs for 10 years from January 3, 2008.
 
Huyun is located in the town of Huyun in Wannian county, Jiangxi Province. Huyun subleases the property from the other shareholders of Huyun and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 10 years from January 3, 2008.
 
Ganzhou is located in Yuliang village in the town of Hengshui in Chingyi County, Ganzhou City, Jiangxi Province.  Ganzhou subleases the property from the other shareholders of Ganzhou and includes the land, pig houses, office buildings, heating system, power and water supply system.   The lease runs for 10 years from January 4, 2008.
 
Gang Feng is located in the town of Fenglin in Dean county, Jiangxi Province. Gang Feng subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 6 and 1/2 years from January 7, 2008.
 
 
31

 

Yichun is located in Nanmiao Township, Yichun City, Jiangxi Province.  Yichun subleases the property from the other shareholders of Yichun and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 10 years from January 9, 2008.
 
Zhejiang Yongxin is located in Pinghu City, Zhejiang Province.  Zhejiang Yongxin subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 12 years from April 18, 2008.
 
Shanghai Fengxian is located in Yuantong Village, Qianqiao Town, Fengxian District, Shanghai City.  Shanghai Fengxian subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.   The lease runs for 14 years from May 1, 2008.
 
Shanghai Tuanxi is located in Tuanxi Village, Datuan Town, Nanjiang District, Shanghai.  Shanghai Tuanxi subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system. The lease runs for 10 years from May 1, 2008.
 
Shanghai Senrong is located in Wanglong Village, Xinnong Town, Jinshan District, Shanghai.  Shanghai Senrong subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 15 years from May 1, 2008.
 
Fujian Muxin is located in Tongan District, Xiamen City, Fujian Province.  Fujian Muxin subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.   The lease runs for 10 years from April 30, 2008.
 
Xiamen Yuanshengtai is located in Xiamen, Fujian Province.  Fujian Yuanshengtai subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 10 years from April 30, 2008.
 
Jiangxi Zhiliang is located in Gancaoqian Village, Dayangzhou, Xingan County, Jiangxi Province. Jiangxi Zhiliang subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.   The lease runs for 22 years from April 30, 2008.
 
Shanghai WeiSheng is located in the Jinshan District, Shanghai City.  Shanghai Weisheng subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 30 years from June 1, 2008.
 
Nanping Minkang is located in the Fujian Province.  Nanping Minkang subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 15 years from September 17, 2008.
 
Guangdong Xinfa is located in Lianjiang City, Guangdong Province.  Guangdong Xinfa subleases the property from the other shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.   The lease runs for 10 years from May 30, 2008.
 
Guangxi Wanghua is located in Nanning City, Guangxi Province.  Guangxi Wanghua subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.   The lease runs for 10 years from May 30, 2008.
 
Guangxi Linxing is located in Guangxi Province.  Guangxi Linxing subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 10 years from September 20, 2008.
 
 
32

 

Nanning Shunhua is located in Guangxi Province.  Nanning Shunhua subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 10 years from October 28, 2008.
 
Nanning Shunan is located in Guangxi Province.  Nanning Shunan subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 10 years from October 29, 2008.
 
Guangxi Gangda is located in Guigang City, Guangxi Province.  Guangxi Huijie acquired all of the rights to the land, pig houses, office buildings, heating system, power and water supply system in our acquisition of Guangxi Gangda. The right to use the land was granted by Housing Bureau and Land Administration Bureau of Guangxi Province through May 30, 2025.
 
Guangxi Gangxuan is located in Guangxi Province.  Guangxi Gangxuan subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system. The lease runs for 11 years from September 20, 2008.
 
Guangxi Guihong is located in Kuiyang Town, Xingye County, Yulin City, Guangxi Province.  Guangxi Huijie acquired all of the rights to the land, pig houses, office buildings, heating system, power and water supply system in our acquisition of Guangxi Guihong. The right to use the land was granted by Housing Bureau and Land Administration Bureau of Guangxi Province through March 31, 2025.
 
Hainan Meilan is located in Xianlai Village, Dazhipo Town, Haikou City, Hainan Province.  Guangxi Huijie acquired all of the rights to the land, pig houses, office buildings, heating system, power and water supply system in our acquisition of Hainan Meilan.  The right to use the land was granted by Housing Bureau and Land Administration Bureau of Guangxi Province through April 12, 2033.
 
Hainan Haikou Wohao Hog Farm (“Hainan Wohao”), a wholly owned subsidiary of Guangxi Huijie, is located in Fuan Village, Shishan Town, Xiuying District, Haikou City, Hainan Province.  Guangxi Huijie acquired all of the rights to the land, pig houses, office buildings, heating system, power and water supply system in our acquisition of Hainan Wohao. The right to use the land was granted by Housing Bureau and Land Administration Bureau of Guangxi Province through April 18, 2038.
 
Guangxi Fuzhi is located in Sujia Village, Zhalin Town, Yanshan District, Guilin City, Guangxi Province.  Guanxi Fuzhi subleases the property from the other shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 20 years from May 30, 2008.
 
Fujian Jianhua is located in Xudun Town, Jian’ou City, Fujian Province.  Fujian Jianhua subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 15 years from April 22, 2008.
 
Fujian Fengxiang is located in Mawei District, Fuzhou City, Fujian Province.  Fujian Fengxiang subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 15 years from April 30, 2008.
 
Nanping Kangda is located in Yanping District, Nanping City, Fujian Province.  Nanping Kangda subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 15 years from May 27, 2008.
 
Fujian Jianxi is located in Zhishan District, Jianou City, Fujian Province.  Fujian Jianxi subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 15 years from May 25, 2008.
 
 
33

 

Item 3.  Legal Proceedings.
 
From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business.  However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business.  We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.
 
Item 4.  Submission of Matters to a Vote of Security Holders.
 
No matters were submitted to a vote of our security holders during the fourth quarter of our fiscal year ended December 31, 2008.
 
 
34

 

PART II
 
Item 5.   Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities.
 
Market Information
 
Through August 28, 2007 our common stock was quoted on the Over-the-Counter Bulletin Board under the symbol “AGFI.OB.”  Our common stock is currently traded on the Nasdaq Global Market under the symbol FEED.  The following table sets forth, for the periods indicated, the quarterly high and low selling prices for our common stock as reported by Nasdaq.
 
   
For the Year Ended December 31,
 
   
2008
   
2007
 
   
High
   
Low
   
High
   
Low
 
First Quarter
  $ 13.75     $ 8.40     $ 5.00     $ 1.85  
Second Quarter
    21.3099       11.61       6.00       4.55  
Third Quarter
    14.95       7.55       9.00       5.55  
Fourth Quarter
    8.09       1.10       16.36       7.16  
 
The closing price for our common stock on March 10, 2009 was $1.05.
 
Holders
 
The number of record holders of our common stock as of March 10, 2009 was 58.
 
Dividend Policy
 
We have not paid any cash dividends on our common stock to date, and we have no intention of paying cash dividends in the foreseeable future. Whether we will declare and pay dividends in the future will be determined by our board of directors at their discretion, subject to certain limitations imposed under Nevada corporate law. In addition, our ability to pay dividends may be affected by the foreign exchange controls in the PRC. The timing, amount and form of dividends, if any, will depend on, among other things, our results of operations, financial condition, cash requirements and other factors deemed relevant by our board of directors.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
We adopted the AgFeed Industries, Inc. 2008 Long-Term Incentive Plan at our 2008 Annual Meeting of Shareholders.  Prior to that time, we did not have a formal equity compensation plan in effect for employees or directors.  
 
 
35

 

The following table provides information as of December 31, 2008 about our common stock that may be issued upon the exercise of options and rights granted to employees or members of our Board of Directors:
 
Plan Category
 
(a)
Number of
Securities to
be
Issued Upon
Exercise of
Outstanding
Options
   
(b)
Weighted-
Average
Exercise
Price
of
Outstanding
Options
   
(c)
Number of
Securities
Remaining
Available
for Future
Issuance Under
Equity
Compensation
Plans
(excluding
securities
reflected
in column (a))
 
Equity compensation plans approved by security holders
   
160,000
   
$
9.32
     
840,000
 
Equity compensation plans not approved by security holders
   
20,000
   
$
8.85
     
-0-
 
Total
   
180,000
   
$
9.27
     
840,000
 
   
(1)
Includes options to purchase 20,000 shares of our common stock, at an exercise price of $8.85 per share, granted to our independent directors in 2007 outside any plan.  

Stock Price Performance Graph

The stock price performance graph below represents a comparison of the five year total return of our common stock, the Nasdaq Composite Index and the CBOE China Index. The graph assumes $100 was invested on November 17, 2006 and dividends are reinvested for all years ending December 31.
 

   
11/17/2006
   
12/31/2006
   
12/31/2007
   
12/31/2008
 
Agfeed Industries, Inc
  $ 100     $ 67     $ 282     $ 54  
Nasdaq Composite Index
  $ 100     $ 99     $ 108     $ 63  
CBOE China Index
  $ 100     $ 114     $ 152     $ 88  
 
 
36

 

Purchases of Equity Securities
 
This table provides certain information with respect to our purchases of shares of our common stock during the fourth quarter of 2008:
 
Issuer Purchases of Equity Securities
 
Period
 
Total Number of
Shares Purchased
   
Average
Price
Paid per
Share
   
Total Number of
Shares Purchased as
Part of Publicly
Announced Plan
   
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plan
 
October 6, 2008 through October 31, 2008
    367,295     $ 4.93       367,295     $ 8,188,254 (1)
Total
    367,295     $ 4.93       367,295     $ 8,188,254 (1)
   
(1)
On October 6, 2008, AgFeed announced that the Board of Directors authorized a $10 million share buyback program.  From October 6, 2008 through October 31, 2008, we repurchased 367,295 shares for gross proceeds of $1,811,746.  We suspended the stock buyback program in December 2008.
 
 
37

 

Item 6.  Selected Financial Data.
 
   
For the Year Ended December 31,
 
   
2008
   
2007
   
2006
 
Net Revenue
  $ 143,661,485     $ 36,163,339     $ 8,594,876  
                         
Cost of Revenue
    109,224,565       25,763,479       5,446,332  
                         
Gross profit
    34,436,920       10,399,860       3,148,544  
                         
Operating expenses
    9,695,989       4,079,089       2,114,650  
                         
Income from operations
    24,740,931       6,320,771       1,033,894  
                         
Non-operating income (expense)
    (6,783,375 )     148,921       41,000  
                         
Income before minority interest and provision for income taxes
    17,957,556       6,469,692       1,074,894  
                         
Minority Interest in Subsidiaries
    (421,519 )     -       -  
                         
Income before provision for income taxes
    17,536,037       6,469,692       1,074,894  
                         
Provision (benefit) for income taxes
    587,222       (193,203 )     (100,386 )
                         
Net income
  $ 16,948,815     $ 6,662,895     $ 1,175,280  
                         
Weighted average shares outstanding :
                       
Basic
    31,557,742       26,093,376       17,911,296  
Diluted
    31,713,977       26,174,973       17,911,296  
                         
Earnings per share:
                       
Basic
  $ 0.54     $ 0.26     $ 0.07  
Diluted
  $ 0.53     $ 0.25     $ 0.07  
 
We believe that "adjusted net income" and "adjusted earnings per share" information, when taken in conjunction with reported results, provide a useful measure of financial performance since they eliminate the impact of certain non-recurring, non-cash charges. These non-GAAP measures should not be considered in isolation or as a substitute for the most comparable GAAP measures. Additionally, the non-GAAP financial measures used by AgFeed may not be comparable to non-GAAP financial measures used by other companies.
 
Adjusted Net Income and Earnings Per Share
 
For the Year Ended December 31,
 
   
2008
   
2007
   
2006
 
                   
Net Income
  $ 16,948,815     $ 6,662,895     $ 1,175,280  
Adjustments
                       
Interest and financing costs related to conversion of convertible debentures
  $ 5,704,358       -       -  
Foreign currency loss
  $ 559,299       -       -  
                         
Adjusted Net Income
  $ 23,212,472     $ 6,662,895     $ 1,175,280  
                         
Basic Weighted Shares Outstanding
    31,557,742       26,093,376       17,911,296  
Adjusted Earnings per Share
  $ 0.74     $ 0.26     $ 0.07  

 
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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The information contained in this section has been derived from the consolidated financial statements of AgFeed. Information contained herein should be read together with AgFeed’s financial statements and related notes included elsewhere in this annual report.
 
Dollar amounts set forth in this Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" are in thousands (000s) unless otherwise indicated.
 
Overview
 
We are a leading producer of premix animal feed and commercial hog production in the PRC. Our premix feed business consists of the research and development, manufacture, marketing and sale of premix feed for use in the domestic animal husbandry markets, primarily the hog raising markets in the PRC.   Premix is an animal feed additive that is broadly used in commercial animal production worldwide. The use of premix feed reduces the time it takes to grow an animal to reach market weight. We have been in the premix feed business since 1995 and currently operate five premix feed manufacturing facilities. Nanchang Best, Shanghai Best, Guangxi Huijie, Shandong Feed and HopeJia operate facilities Jiangxi, Shanghai, Guangxi, Shandong, and Hainan provinces, respectively.
 
In November 2007, we acquired Lushan and entered the hog breeding and production business. In addition to our premix feed business, we are also engaged in the business of raising, breeding and selling hogs in China.  As of December 31, 2008, the Company owned 30 operating hog farms located in Jiangxi, Shanghai, Hainan, Guangxi and Fujian provinces, which are in or near the largest pork consumption areas in the PRC. The 30 hog farms are well-structured and well-managed through five hog production management branches featuring centralized resources including sales, human resources, purchasing and finance departments in Jiangxi, Shanghai, Guangxi, Fujian and Hainan provinces.
 
We have developed a system of centralized raw material purchases, accounting and internal control management, corporate marketing strategies and brand building.  AgFeed has created, and centrally manages, an animal disease control response team.  This team consists of experienced hog industry professionals that are used by each of our subsidiaries across both of our lines of business. Our increased size and economies of scale throughout 2008 have benefited us greatly in both raw materials cost savings and administrative efforts.
 
AgFeed had revenues of $143.66 million for the year ended December 31, 2008 compared to revenues of $36.16 million for the year ended December 31, 2007.  The increase (297%) we experienced in this period was the result of our organic growth in our feed business and the hog farm acquisitions we made during the year.
 
Feed Business
 
In our feed business, we operate each subsidiary independently with regard to manufacturing and local marketing and sales efforts.  We share sales referrals and leads among the subsidiaries, but our subsidiaries do not compete against each other for new sales. Most of our research and development occurs at Nanchang Best and Guangxi Huijie.  The results of our R&D efforts are for the benefit of, and shared with, each of our feed operating companies.
 
As of December 31, 2008, we had established relationships with over 1,000 independently owned feed distribution chain stores that sell our products exclusively, targeting backyard and small hog farms. These complement our direct sales to more than 660 large size commercial hog farms. We rely on the distributors to market and sell our products to the smaller hog farms.  Approximately 75% of China’s total annual hog production is supplied by backyard and small farms that raise less than 100 hogs per year per family. Through our network of distributors and direct sales, we are able to market our premix feed to the producers of more than 90% of the annual hog production in China.
 
 
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AgFeed is one of a handful of companies that have received “Green Certification” from the Minister of Agriculture of PRC for its premix products under the brand label “BEST.”  This means that these products are safe, environmentally-friendly, and can effectively promote the healthy growth of pigs. According to current government regulations, pork cannot be accredited by the government as “green” unless it is produced using government certified green feed. Having our feed certified as green requires us to adhere to strict operational controls and procedures. This green certification laid the ground for our Hog Farms to produce hogs providing green pork. It is also an incentive for other commercial hog farms to enter into sales contracts with our feed operations.
 
AgFeed invests capital in research and development to maintain and improve on a superior quality product while experimenting with environmentally sensitive premix formulas. We will continue to invest up to 1% of our revenues to increasing our long term profitability and competitiveness.
 
In the last year AgFeed managed to negotiate a number of agreements with dealers and suppliers to ensure that we receive supplies of key raw materials at a discount to market.  This is an important aspect of our ongoing strategy to mitigate corn and soybean meal price disruptions. Additionally, to maintain reasonable profit, we increased our selling price in the spring of 2008 in the midst of the rising and uncertain raw material market.
 
The increase in our revenues during the year ended December 31, 2008 was due to increases in the volume of products sold as a direct result of new products launched and our expansion into new markets. Due to a stronger AgFeed brand name, we were able to raise our premix feed prices several times in our second quarter and successfully mitigate the effects of increased costs of raw materials during the year .
 
We also experienced increases in our cost of goods sold during the year ended December 31, 2008.  The costs of corn and soybean meal, which are two of our main raw materials, increased approximately 5 to 12% and 15 to 50%, respectively. The cost of corn stabilized during the last half of 2008.
 
Hog Production Business
 
In our hog production business, we have grown our business through strategic acquisitions of current producing commercial hog farms.  Since November 2007, we have acquired at least a majority interest in one breeder hog farm and an additional 29 operating hog farms.  These farms are located in Jiangxi, Fujian, Shanghai and Guangxi provinces. All of our hog farms are immediately accretive to earnings. We sell live hogs in two of China’s wealthiest regions – Shanghai and Guangdong, both of which have China’s highest hog prices as well as deep pork consuming cultures.
 
We have effectively marketed our products through a team-based approach, sharing sales leads and referrals. Due to centralized procurement processes, we have been able to offset production costs related to corn, soybean meal, veterinary drugs and animal health products.
 
For 2009, AgFeed plans to achieve a production capacity of up to 650,000 hogs.  This capacity is based on a projected average sow population of 31,500 head at an average production per sow of 17.6 hogs (554,400 hogs), coupled with the potential purchase and finishing of baby pigs as market conditions warrant.  We believe this could add an additional 100,000 to 150,000 hogs to our sale total.
 
AgFeed is studying the entrance into a genetics program that can potentially significantly improve hog productivity and profitability through a higher number of piglets born per sow and lower feed costs due to improved feed to meat conversion ratios as better hog types grow faster while consume less feed.
 
AgFeed's future investment plans include modernization of our pork production facilities, investment in reporting and cash management systems and the training of our employees, environmental and health safety programs including an emphasis on upgrading bio security. These actions are part of our effort to improve on the standards of the new proposed China Safety Law to be implemented on June 1,2009 and to assure consistent high quality and safe pork.
 
 
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According to the China Feed Industry Association, the PRC has the world's largest and most profitable markets for hog production with approximately 600 million hogs produced annually, compared to approximately 100 million in the US. More than 1.2 billion Chinese consume pork as their primary source of meat. 65% of all meat consumed in the PRC is pork. Chinese consumers consume more pork each year than the rest of the world combined. Pork production in China is a key political, social and security issue for consumers. The PRC Government supports hog producers with favorable tax status and subsidies, insurance, vaccines, caps on feed costs and land use grants. Hog production is exempt from all taxes and sow owners receive government grants and subsidies.
 
Examples of the importance that the PRC puts on hog production are exemplified by the adoption of new policies and enactment of new laws benefiting hog producers. In January 2008, the Chinese central government instituted a set of measures that could prevent large declines in hog prices with the view of stabilizing hog production and hog prices in order to protect the interest of hog farms. In July 2008, the NDRC announced that they were channeling $5.6 billion RMB for livestock farm construction and another $2.8 billion RMB to support live pig production. The Food Safety Law, which goes into effect on June 1, 2009, provides a legal basis for the government to strengthen food safety control “from the production line to the dining table.”
 
Critical Accounting Policies
 
In presenting our financial statements in conformity with accounting principles generally accepted in the United States, we are required to make certain estimates and assumptions that affect the amounts reported therein.  Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events.  However, events that are outside of our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions.  If there is a significant unfavorable change to current conditions, it will likely result in a material adverse impact to our consolidated results of operations, financial position and liquidity. We believe that the estimates and assumptions we used when preparing our financial statements were the most appropriate at that time.  Presented below are those accounting policies that we believe require subjective and complex judgments that could potentially affect reported results.
 
Use of Estimates.  Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates, including those related to impairment of long-lived assets and allowance for doubtful accounts.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.
 
Areas that require estimates and assumptions include valuation of accounts receivable and inventory, determination of useful lives of property and equipment, estimation of certain liabilities and sales returns.
 
Allowance For Doubtful Accounts.  We continually monitor customer payments and maintain a reserve for estimated losses resulting from our customers’ inability to make required payments. In determining the reserve, we evaluate the collectability of our accounts receivable based upon a variety of factors. In cases where we become aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, we record a specific allowance against amounts due. For all other customers, we recognize allowances for doubtful accounts based on our historical write-off experience in conjunction with the length of time the receivables are past due, customer credit worthiness, geographic risk and the current business environment. Actual future losses from uncollectible accounts may differ from our estimates.
 
 
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Inventories.  Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. We evaluate our ending inventories for estimated excess quantities and obsolescence. Our evaluation includes the analysis of future sales demand by product, within specific time horizons. Inventories in excess of projected future demand are written down to net realizable value. In addition, we assess the impact of changing technology on inventory balances and writes-down inventories that are considered obsolete. Inventory obsolescence and excess quantities have historically been minimal.
 
Long-Lived Assets.  We periodically assess potential impairments to our long-lived assets in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 requires, among other things, that an entity perform an impairment review whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable.  Factors we considered include, but are not limited to: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for our overall business; and significant negative industry or economic trends. When we determine that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, we estimate the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, we recognize an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair market value of the asset, based on the fair market value if available, or discounted cash flows. To date, there has been no impairment of long-lived assets.
 
Property and Equipment.  Useful lives of property and equipment is based on historical experience and industry norms. Changes in useful lives due to changes in technology or other factors can affect future depreciation estimates.
 
Revenue Recognition. Our revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) 104. Revenue is recognized when services are rendered to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of AgFeed exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. We are not subject to VAT withholdings.  We give volume rebates to certain customers based on volume achieved. AgFeed accrues sales rebates based on actual sales volume. Sales returns and rebates included in our revenues were $1,192,157, $385,375 and $324,218 for the years ended December 31, 2008, 2007 and 2006, respectively.
 
We make estimates and judgments when determining whether the collectability of revenue from customers is reasonably assured.  Management estimates regarding collectability impact the actual revenues recognized each period and the timing of the recognition of revenues.  Our assumptions and judgments regarding future collectability could differ from actual events, thus materially impacting our financial position and results of operations.
 
Sales returns and allowances have historically been insignificant.  Accordingly, estimating returns is not critical.  However, if circumstances change, returns and allowance may impact the company’s earnings.
 
There are no differences in our arrangements with our different types of customers.  Accordingly, we do not have different revenue recognition policies for different types of customers.   We offer credit terms ranging from 30 to 90 days for most customers.  From some large customers, we may extend these terms beyond 90 days.
 
 
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Recent Accounting Pronouncements
 
In June 2007, FASB issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities”, which addresses whether nonrefundable advance payments for goods or services used or rendered for research and development activities should be expensed when the advance payment is made or when the research and development activity has been performed.  Management is currently evaluating the effect of this pronouncement on our financial statements.
 
In December 2007, FASB issued SFAS No. 141 (Revised 2007), “Business Combinations.” SFAS 141R changes how a reporting enterprise accounts for the acquisition of a business. SFAS 141R requires an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions, and applies to a wider range of transactions or events. SFAS 141R is effective for fiscal years beginning on or after December 15, 2008. Early adoption and retrospective application is prohibited.
 
In December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” which is an amendment of ARB No. 51.  SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  SFAS 160 changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest.  SFAS 160 is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  Based on current conditions, we do not expect the adoption of SFAS 160 to have a significant impact on our results of operations or financial position.
 
In March 2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133.”  SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  Based on current conditions, we do not expect the adoption of SFAS 161 to have a significant impact on our results of operations or financial position.
 
In May 2008, FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.”  SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States.  SFAS 162 will not have an impact on our financial statements.
 
In May 2008, FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60.”  The scope of SFAS 163 is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60. Accordingly, SFAS 163 does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). SFAS 163 also does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 163 will not have an impact on our financial statements.
 
 
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Results of Operations
 
Comparison of Fiscal Years Ended December 31, 2008 and December 31, 2007
 
   
As of December31,
             
   
2008
   
2007
   
$ Change
   
% Change
 
Revenues
 
$
143,661,485
   
$
36,163,339
   
$
107,498,146
     
297.3
%
Cost of Sales
   
109,224,565
     
25,763,479
     
83,461,086
     
324.0
 
Gross Profits
   
34,436,920
     
10,399,860
     
24,037,060
     
231.1
 
Operating Expenses
   
9,695,989
     
4,079,089
     
5,616,900
     
137.7
 
Interest and financing costs
   
 (5,704,358
)
   
(153,723
)
   
(5,550,635
)
   
3,610.8
 
Net Income
   
16,948,815
     
6,662,895
     
 10,285,920
     
154.4
 
 
Revenues.  Compared to the same period in 2007, the increase in revenues was due to an increase in the volume of feed products that we sold and the acquisition of our hog farms.  The increase in feed product sales was a result of expanding our distribution channels by the opening of additional exclusive distribution stores for our products.   We experienced favorable market conditions that increased the demand for our feed products.  A stronger “AgFeed” brand name allowed us to successfully increase our price twice in the second quarter of 2008. Due to softening in the market for hog prices, we experienced a decrease in the selling price for our hogs during the second half of 2008. However, as a result of economies of scale, we were able to cut hog production cost through centralized raw materials purchases, sales and marketing channels, and finance and internal control management.
 
Cost of Goods Sold. We experienced increases in the unit cost of goods sold for our two business lines during the twelve month period ended December 31, 2008 compared to the same period in 2007. The cost of goods sold included costs in both premix feed and hog production. These raw materials constitute approximately 60 - 75% of our raw material costs.  
 
Gross Profit.  Gross margins decreased to 23.97% from 28.76% during the twelve month period ended December 31, 2008 as compared to the same period last year.  The decrease in gross margin can be attributed to the increase in the cost of hog feed during the 2008 last two quarters, and a substantial general sell-off of swine inventory resulting in falling prices after the 2008 Olympics ended. This was modified somewhat by actions taken in the first half of 2008, including expansion of our product distribution channels, and our entry into long-term contracts for key product ingredients which locked in favorable cost savings.
 
Selling, General and Administrative Expenses.   General and administrative expense includes overhead expenses such as rent, management and staff salaries, general insurance, marketing, accounting, legal and offices expenses. The increase in our selling, general and administrative expense also reflects the addition of our new subsidiaries, which had a total of approximately $9.7 million in selling, general and administrative expenses during 2008. Selling expenses for the period increased by 46.32% due to costs associated with the aggressive expansion into markets in neighboring provinces, and the costs associated with the absorption of our new subsidiaries. 
 
Interest and Financing Costs. We incurred interest and financing costs of approximately $5.7 million during 2008, principally as a result of the issuance of $19 million principal amount of convertible notes issued during February 2008.  $15.2 million of the convertible notes were converted into shares of common stock, resulting in the non-recurring accelerated amortization of the debt issuance costs and debts discounts amounting to approximately $5.8 million.
 
Due to foreign exchange appreciation in RMB against the USD, we incurred a one-time, non-recurring loss on foreign translation of $559,299 during 2008, as it is hard to timely convert USD deposits into RMB to implement these procedures due to SAFE regulations.
 
 
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Hog production is an income tax exempt sector in China and sow owners receive government grants and subsidies.  Our feed manufacturing companies benefit from exemption from value-added tax.
 
Net Income.   The increase in our net income was due to higher sales and the benefits from economies of scale in our business resulting in a modest increase in operating efficiency. This was offset by one time, non-operational related charges and interest expenses associated with the conversion of a portion of the $19 million of convertible notes by investors during 2008. We continued to benefit from the tax exempt status for our hog production business.
 
Comparison of Fiscal Years Ended December 31, 2007 and December 31, 2006
 
   
As of December 31,
             
   
2007
   
2006
   
$ Change
   
% Change
 
Revenues
  $ 36,163,339     $ 8,594,876     $ 27,568,463       321 %
Cost of Sales
    25,763,479       5,446,332       20,317,147       373  
Gross Profits
    10,399,860       3,148,544         7,251,316       230  
Selling, General and Administrative Expenses
    4,079,089       2,114,650         1,964,436       93  
Net Income
    6,662,895       1,175,280         5,487,615       467  
 
Revenues.  The increase in revenues was due to an increase in the volume of feed products that we sold, the acquisition of Guangxi Huijie and the introduction in early 2007 of the Airubao Series, a new special blended feed product formulated especially for baby pigs.  Guangxi Huijie contributed approximately 858 metric tons of premix volume during the fiscal year ended December 31, 2007, Nanchang Best experienced a decrease of approximately 838 metric tons and Shanghai Best experienced an increase of approximately 1,335 metric tons of premix during the year ended December 31, 2007 as compared to the year ended December 31, 2006 to account for the increase in premix volume. We focused on increasing sales of the Airubao Series, which is a special blended feed product.  For comparative purposes, we will analyze the blended feed and Airubao Series together. This increase was due primarily to the new Airubao sales and approximately 394 metric tons of blended feed sold by Guangxi Huijie.  Nanchang Best sold 12,165 metric tons during the year ended December 31, 2007 compared to 1,097 metric tons during the same period in 2006.  Guangxi Huijie also accounted for 1,581 metric tons of other feed products, Nanchang Best sold 226 metric tons and Shanghai Best sold 231 metric tons of other feed products during the year ended December 31, 2007.  Overall, the Guangxi Huijie acquisition provided approximately 31% of our revenues while Nanchang Best provided 42% and Shanghai Best provided 27% of our total revenues during the fiscal year ended December 31, 2007.  Guangxi Huijie contributed approximately 29.3%, Nanchang Best approximately 48.1% and Shanghai Best approximately 22.6% of the total volume of feed sold during the year ended December 31, 2007.  Nanchang Best’s revenues increased approximately 226% during the year ended December 31, 2007 compared to the same period in 2006.  Shanghai Best’s revenues increased approximately 187% during the year ended December 31, 2007 compared to the same period in 2006. Lushan, acquired in November 2007, did not materially contribute to our overall revenues.
 
Cost of Goods Sold.  We experienced an approximate 46% and 35% increase in the unit cost of goods sold for blended feed and premix products, respectively, during the twelve month period ended December 31, 2007 compared to the same period in 2006.  In order to provide excellent customer service and differentiate ourselves from our competition, at our customers’ request, we supply them with customized formulations of our products.  In any given month, the cost of the various additives used fluctuates, which can result in temporary increases in unit cost of goods sold. We experienced an increase in the costs of corn and soybean meal of approximately 12 and 20%, respectively over their levels during the year ended December 31, 2007.  These additives constitute approximately 70% of our raw material costs.  These increased costs offset our increases in revenues.  Even though this may have an adverse effect on our short term profits, we take the long-term view that this practice results in increased customer loyalty, builds the AgFeed brand and will ultimately lead to increased sales and gross profits.  In addition, we are presently experiencing more stable pricing in these additives, which we anticipate will stabilize our cost of goods sold.
 
 
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Nanchang Best experienced a 269% increase in cost of goods sold during the year ended December 31, 2007 compared to the same period in 2006.  Shanghai Best experienced a 233% increase in cost of goods sold during the year ended December 31, 2007 compared to the same period in 2006.
 
Gross Profit. Gross margins decreased to 29% for the year ended December 31, 2007 from 37% for the same period in 2006.  The decrease in gross margin can be attributed to several factors: (i) the cost of introducing the Airubao Series; (ii) we experienced an approximate 46% increase in the unit cost of goods sold of blended feed during the twelve months ended December 31, 2007 compared to the same period in 2006; (iii) the unit cost of goods sold for premix products increased approximately 35% during the year ended December 31, 2007 compared to the same period in 2006.
 
Gross margins at Nanchang Best for the year ended December 31, 2007 were approximately 26% compared to 34% for the same period in 2006.  Gross margins at Shanghai Best for the year ended December 31, 2007 were 28% compared to 38% for the same period in 2006.  Gross margins at Guangxi Huijie for the year ended December 31, 2007 were approximately 28%.  Gross margin calculations for each subsidiary are calculated prior to any adjustments for intercompany sales, which are reflected in the consolidated financial statements.
 
Selling, General and Administrative Expenses.  We incurred legal and audit expense in the year ended December 31, 2007 of approximately $450,000 associated with being a U.S. publicly traded reporting company that we did not incur during the same period in 2006.  The increase in our general and administrative expense also reflects the addition of Guangxi Huijie, which had approximately $878,000 of general and administrative expenses during the year ended December 31, 2007.  General and administrative expense includes overhead expenses such as rent, management and staff salaries, general insurance, marketing, accounting and legal and office expenses. Selling expenses for the period increased by 109% due to the 321% increase in revenues and the costs associated with entering markets in neighboring provinces as well as the addition of Guangxi Huijie, which had approximately $639,000 of selling expenses during the year ended December 31, 2007. We attempted to control our selling expenses through the use of strict cost controls and efficient use of our distribution channels.
 
Net Income. Our increase in net income was due to an increase in income from operations offset by an increase in non-operating income due to net interest expense offset by other income of approximately $149,000.  The major reason for the increase in non-operating income during 2007 was interest earned on the net proceeds of our financings of approximately $142,000 and other income of approximately $160,000 offset by interest paid in connection with short term loans of approximately $154,000. In addition, our Nanchang Best subsidiary became a Sino Foreign Joint Venture due to an investment by a foreign investor in July 2006.  Nanchang Best receives favorable tax status and is exempt from all income tax through July 14, 2008 after which will pay tax at a reduced rate of 15% for the next three years.
 
Off-Balance Sheet Arrangements
 
There were no off-balance sheet arrangements during the year ended December 31, 2008 that have, or are reasonably likely to have, a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our interests.  
 
Liquidity and Capital Resources
 
At December 31, 2008, we had $24,839,378 in cash and cash equivalents on hand.
 
 
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During first quarter of 2008, we completed a $41,000,000 financing.  We received aggregate gross proceeds of $22,000,032 through the sale of 2,444,448 shares of common stock at $9 per share.  We received aggregate proceeds of $19,000,000 through the issuance of three year convertible notes bearing interest at 7% per annum and convertible into common stock at $10 per share.  In connection with the convertible notes, we issued 380,000 warrants which are exercisable immediately and have a $10 strike price.  We paid $3,432,670 related to the sale of shares and $1,716,666 related to the issuance of the convertible notes.
 
On April 16, 2008, we entered into a Securities Purchase Agreement with institutional investors in connection with a registered direct offering of securities providing for the issuance of 625,000 shares of our common stock at price of $16.00 per share for aggregate gross proceeds of $10,000,000.
 
On April 22, 2008, we entered into Securities Purchase Agreements with institutional investors in connection with a registered direct offering of securities providing for the issuance of 1,322,836 shares of the Company’s Common Stock at price of $19.05 per share for aggregate gross proceeds of $25,200,026.
 
On December 29, 2008, we completed a financing and raised gross proceeds of $8.75 million through the sale to institutional investors of 5 million newly issued common stock units at $1.75 per unit under an effective Form S-3 Registration Statement. Each unit consists of one share of newly issued common stock and a warrant to purchase 0.7 of a share of common stock for $2.50 a share, which is exercisable over a five-year period.
 
During the period from October 6, 2008 through October 31, 2008, the Company repurchased 367,295 shares of our common stock for gross proceeds of $1,811,746. No additional shares have been repurchased.
 
During the year ended December 31, 2007, we completed two private placement offerings of our securities.  Through the final closing of the first private placement offering on April 29, 2007, we received aggregate gross proceeds of $6,830,259 from the sale of an aggregate of 2,276,753 units to 37 accredited investors. Each unit was priced at $3.00 and represented one share of our common stock and a warrant to purchase eight percent of one share of common stock.  Accordingly, we issued an aggregate of 2,276,753 shares of our common stock and warrants to purchase an aggregate of 182,146 shares of our common stock to the 37 accredited investors who participated in this offering.  In connection with the private placement, fees of eight percent of the securities placed were paid in cash and a number of common stock purchase warrants equal to eight percent of the units placed were paid to participating dealers and one finder.  Accordingly, we paid $546,421 and issued warrants to purchase 182,141 shares of our common stock to the participating dealers and finder.  All of the common stock purchase warrants issued have a three-year term and have an initial exercise price of $5.00.  We received net proceeds from the private placement of $6,247,503, after deduction of the costs associated with the financing of $582,756
 
On June 22, 2007, we completed a second private placement offering pursuant to which we sold 750,000 units at an offering price of $4.00 per unit for gross proceeds of $3,000,000.  Each unit sold consisted of one share of common stock and one warrant to purchase 25 percent of one share of common stock.  Accordingly, we issued 750,000 shares of our common stock and warrants to purchase 187,500 shares of our common stock to the one accredited investor that participated in this offering.  In connection with this private placement offering, a fee of eight percent of the securities placed was paid in cash and a number of common stock purchase warrants equal to eight percent of the units placed were paid to a finder.  Accordingly, we paid $240,000 in cash and issued warrants to purchase 60,000 shares of our common stock to the finder.  All stock purchase warrants are exercisable for a period of three years at an exercise price of $5.60 per share.  We received net proceeds from the private placement of $2,760,000, after deduction of costs associated with the financing.
 
As of December 31, 2008, we had no outstanding loans.  The loans that we entered into in 2006 and 2007 were paid in full during the second quarter of 2008.
 
 
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During the year ended December 31, 2008, we generated $18,456,186 of cash from our operating activities. The cash was generated primarily due to net income of $16,948,815, non-cash  expenses of $7,558,935 offset by an increase in operating assets, net of $6,051,564.
 
We used $78,327,198 in investing activities during the year ended December 31, 2008; of which $10,696,569 was for the acquisition of property and equipment, and $67,490,049 for the acquisition of the 29 Hog Farms and one feed company.
 
We received $76,466,637 in cash from financing activities.  During the year ended December 31, 2008, we received $65,950,069 from the sale of our securities and paid $7,030,261 in offering costs. We also received $19,000,000 from the issuance of convertible notes and warrants, of which the Company paid $1,716,666 for the cost of issuing the convertible notes and warrants. In addition, warrants holders exercised 269,456 warrants resulting in gross proceeds to us of $2,138,848 and minority interest holders contributed $1,097,690.
 
At December 31, 2008, our accounts receivable balance was approximately $9.46 million, a reduction of $1.3 million in the last quarter alone. There is no accounts receivable for hog sales because the farmers purchasing hogs from us generally pay cash.
 
Our principal demands for liquidity are to increase capacity, raw materials purchase, sales distribution, and the possible acquisition of producing hog farms or joint ventures in our industry as opportunities present themselves, as well as general corporate purposes.  We anticipate that the amount of cash we have on hand as of the date of this report as well as the cash that we will generate from operations will satisfy these requirements.   We may seek additional funds from the capital markets as we identify additional acquisition candidates.  We expect all of our hog farm acquisitions in the future to be accretive to earnings.
 
We intend to meet our liquidity requirements, including capital expenditures related to the purchase of equipment, purchase of raw materials, and the expansion of our business, through cash flow provided by operations and funds raised through cash investments.
 
The majority of the our revenues and expenses were denominated in RMB, the currency of the PRC.  There is no assurance that exchange rates between the RMB and the USD will remain stable.
 
Contractual Obligations
 
No contractual obligation occurred during the year ended December 31, 2008 and therefore it is not expected to have any effect on our liquidity and cash flow in future periods.
 
Inflation and Seasonality
 
Demand for our products remains fairly consistent throughout the year and we do not believe our operations have been materially affected by inflation or seasonality.
 
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.
 
Disclosures About Market Risk
 
We may be exposed to changes in financial market conditions in the normal course of business.  Market risk generally represents the risk that losses may occur as a result of movements in interest rates and equity prices.  We currently do not use financial instruments in the normal course of business that are subject to changes in financial market conditions.
 
 
48

 

Currency Fluctuations and Foreign Currency Risk
 
Substantially all of our operations are conducted in the PRC, with the exception of our limited export business and overseas purchases of raw materials.  Most of our sales and purchases are conducted within the PRC in RMB, which is the official currency of the PRC.  The effect of the fluctuations of exchange rates is considered minimal to our business operations.
 
Substantially all of our revenues and expenses are denominated in RMB.  However, we use US dollars for financial reporting purposes.  Conversion of RMB into foreign currencies is regulated by the People’s Bank of China through a unified floating exchange rate system.  Exchange rate fluctuations may adversely affect the value, in U.S. dollar terms, of our net assets and income derived from its operations in the PRC.
 
Interest Rate Risk
 
We do not have significant interest rate risk, as loans we had entered into in 2006 and 2007 were paid in full during the second quarter of 2008.
 
Credit Risk
 
We have not experienced significant credit risk, as most of our customers are long-term customers with superior payment records.  Our receivables are monitored regularly by our credit managers.
 
Item 8.  Financial Statements and Supplementary Data.
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
   
            Page            
 
 Report of Independent Registered Public Accounting Firm
  F-1  
 Consolidated Balance Sheet at December 31, 2008 and 2007
  F-2  
 Consolidated Statements of Income and Other Comprehensive Income for the Years Ended December 31, 2008, 2007 and 2006
  F-3  
 Consolidated Statement of Shareholders' Equity for the Years Ended December 31, 2008, 2007 and 2006
  F-4  
 Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006 
  F-5  
 Notes to Consolidated Financial Statements
 
F-6 to F-29
 
 
Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
 
None.
 
Item 9A.  Controls and Procedures
 
Disclosure Controls and Procedures.
 
Our management, under the supervision and with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange "Act")) as of the end of the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act.  Disclosure controls and procedures are those controls and procedures designed to provide reasonable assurance that the information required to be disclosed in our Exchange Act filings is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.  Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10K.
 
 
49

 

Management’s Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”).  Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and or the Board of Directors of AgFeed; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of AgFeed’s assets that could have a material effect on the interim or annual consolidated financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
 
Under the supervision and with the participation of our chief executive officer and chief financial officer, management conducted an evaluation of the effectiveness of AgFeed’s internal control over financial reporting as of December 31, 2008, using the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
Based on this evaluation, our management concluded that our internal control over financial reporting was effective and that there was no material weakness or significant deficiency discovered as of December 31, 2008.
 
There are newly acquired subsidiaries excluded from our Sarbanes-Oxley compliance scope for 2008, whose aggregated financial statements constitute 71.1% of total assets, 67.6% of revenue, and 97.0% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2008.
 
Management’s evaluation of the effectiveness of AgFeed’s internal control over financial reporting as of December 31, 2008 has been audited by Goldman Parks Kurland Mohidin LLP, an independent registered public accounting firm, as stated in their report included on page F-1.
 
Remediation of Fiscal Year 2007 Material Weaknesses
 
We have previously disclosed in our Annual Report on Form 10K for the year ended December 31, 2007 that we have identified material weaknesses in internal control over financial reporting.  The following summarizes the material weaknesses reported as of December 31, 2007 and the remedial action taken by AgFeed:
 
 
1.
AgFeed did not maintain effective controls to ensure there is adequate analysis, documentation, reconciliation, and review of accounting records and supporting data, especially as it relates to subsidiary accounting records. AgFeed did not maintain effective controls over its financial reporting process. Specifically, AgFeed lacked policies, procedures, and controls for the preparation and review of the interim and annual consolidated financial statements and supporting schedules. This control deficiency contributed to the individual material weaknesses described below:
 
 
50

 

 
a)
AgFeed did not maintain effective controls over its preparation, review, and approval of significant account reconciliations and journal entries. Specifically, AgFeed did not maintain effective controls over the completeness and accuracy of underlying data for supporting schedules and journal entries for all of its significant balance sheet and income statement accounts.
 
 
b)
AgFeed did not maintain effective control over certain spreadsheets utilized in the period end financial reporting process. Specifically, AgFeed lacked effective controls related to the completeness, accuracy, validity, and restricted access to spreadsheets related to: fixed assets, including accumulated depreciation; payroll reconciliations and related journal entries; revenue and accounts receivable. This control deficiency did not result in audit adjustments to the 2007 interim or annual consolidated financial statements.
 
In summary with respect to the control deficiencies in a) through b) above could result in a material misstatement of the aforementioned accounts or disclosures that would result in a material misstatement to AgFeed’s interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that each of the control deficiencies described in a) through b) above constitutes a material weakness.
 
A number of actions were taken by AgFeed to remediate this, including:
 
 
·
Implemented Kingdee K3, a new information technology ERP system.
 
 
·
Embedded IT application controls about journal entry preparation, review and approval, posting and closing, functional reconciliation and analysis in Kingdee K3.
 
 
·
Established and standardized manual controls to review journal entries, non-routine transactions, chart of accounts, accounting policies and estimates financial statements both at subsidiary level and consolidated level etc. to ensure accuracy and completeness.
 
 
·
Established controls for the preparation and review of the financial reporting, which includes long-lived assets assessment, use of disclosure checklist, management discussion and analysis checklist, review and communication with senior management.
 
 
·
Established end user controls over financial reporting, which include risk assessment of key spreadsheets, change controls, access controls, protect and logic verification controls, segregation of duty controls, backup controls etc.
 
 
·
Implemented fixed assets module, Sales and Account Receivable module in Kingdee K3 to replace prior spreadsheets in these two business processes.
 
As of December 31, 2008, we have concluded that this material weakness has been remediated.
 
 
2.
AgFeed did not maintain effective controls over changes to critical financial reporting applications and over access to these applications and related data. Specifically, certain of AgFeed’s personnel had unrestricted access to various financial application programs and data beyond the requirements of their individual job responsibilities in processing accounts payable, inventory and revenue transactions. Such access was beyond the requirements of their assigned responsibilities and was not appropriately monitored. This control deficiency did not result in audit adjustments to the 2007 interim or annual consolidated financial statements. However, this control deficiency could result in a material misstatement of significant accounts or disclosures, including those described above, that would result in a material misstatement to AgFeed’s interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.
 
 
51

 

A number of actions were taken by AgFeed to remediate this, including:
 
 
·
Established change management policy, including controls and procedures about system change, software change, network change, emergency change etc.
 
 
·
Established controls that the impact, implementation plan, rollback plan, user test result and feedback of any change were required to be prepared and submitted to the IT manager for approval.
 
 
·
Established controls that different VLAN are used in finance and other departments and users of different departments could not visit each other VLAN.
 
 
·
Established password management and configuration parameter in Kingdee K3 system.
 
 
·
Established Kingdee K3 user accounts management policy to authorize user rights delivery and change, restrict super user’s activity in K3 and detect redundant access rights periodically.
 
 
·
Established log management policy.  Servers, Kingdee K3 system and relevant database log functions have been activated and user’s activities in the system are recorded and inspected periodically.
 
As of December 31, 2008, we have concluded that this material weakness has been remediated.
 
 
3.
AgFeed does not maintain a sufficient level of IT personnel to execute general computing controls over our information technology structure, which include the implementation and assessment of information technology policies and procedures. This control deficiency did not result in an audit adjustment to the 2007 interim or annual consolidated financial statements, but could result in a material misstatement of significant accounts or disclosures, which would not have been prevented or detected.  Accordingly, management has determined that this control deficiency constitutes a material weakness.
 
A number of actions were taken by AgFeed to remediate this, including:
 
 
·
Established IT function in the headquarter in China and employed three full-time IT staff in-charge of the company's network and database management, Kingdee K3 application system management and operational system management, respectively.  They all had academic background of information technology and a wealth of IT knowledge and experiences in their respective competence.  IT staff are required to perform KPI evaluation quarterly.
 
 
·
IT function established and implemented the information technology policies and procedures. IT policies and procedures include (but not limited to): Kingdee ERP development policy, change management policy, password management rules, user accounts management policy, log management policy, information security management policy, system and database SOD rules, system configuration rules, and data operation procedures etc.  IT manager is responsible for monitoring and reviewing the operating effectiveness for the policies and procedures regularly.
 
 
·
Appointed an independent third party consultant to assist the management to perform periodical review and evaluation of IT entity level control, IT general control, IT application control and end user control.
 
 
52

 

As of December 31, 2008, we have concluded that this material weakness has been remediated.
 
 
4.
AgFeed did not maintain adequate segregation of duties within its critical financial reporting applications, the related modules and financial reporting processes. This control deficiency did not result in audit adjustments to the 2007 interim or annual consolidated financial statements. This control deficiency  could result in a misstatement of balance sheet and income statement accounts, in AgFeed’s interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that these control deficiencies constitute a material weakness.
 
A number of actions were taken by AgFeed to remediate this, including:
 
 
·
Allocated appropriate access rights to Kingdee K3 users, especially for finance department, roles and responsibilities in business processes according to positions.
 
 
·
Developed segregation of duties checklists for all significant business processes.
 
 
·
Detected segregation of duty conflicts by finance manager of each subsidiary periodically.
 
 
·
Established Kingdee K3 user accounts management policy to authorize user rights delivery and change, restrict super user’s activity in K3 and detect redundant access rights periodically.
 
As of December 31, 2008, we have concluded that this material weakness has been remediated.
 
Changes in Internal Control Over Financial Reporting
 
The discussion above under "Remediation of Fiscal Year 2007 Material Weaknesses" includes descriptions of the material actual changes to AgFeed's internal control over financial reporting during the year of 2008 that materially affected, or are reasonably likely to materially affect, AgFeed's internal control over financial reporting.
 
Item 9B.  Other Information.
 
None.
 
 
53

 

PART III
 
Item 10.  Directors, Executive Officers and Corporate Governance.
 
The information required by this Item is incorporated by reference to the information contained in our Proxy Statement for our 2009 Annual Meeting of Shareholders, which we will file with the SEC within 120 days after the end of 2008.
 
Item 11.  Executive Compensation.
 
The information required by this Item is incorporated by reference to the information contained in our Proxy Statement for our 2009 Annual Meeting of Shareholders, which we will file with the SEC within 120 days after the end of 2008.
 
Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
 
The information required by this Item is incorporated by reference to the information contained in our Proxy Statement for our 2009 Annual Meeting of Shareholders, which we will file with the SEC within 120 days after the end of 2008.
 
Item 13.  Certain Relationships and Related Transactions, and Director Independence.
 
The information required by this Item is incorporated by reference to the information contained in our Proxy Statement for our 2009 Annual Meeting of Shareholders, which we will file with the SEC within 120 days after the end of 2008.
 
Item 14.  Principal Accounting Fees and Services.
 
The information required by this Item is incorporated by reference to the information contained in our Proxy Statement for our 2009 Annual Meeting of Shareholders, which we will file with the SEC within 120 days after the end of 2008.
 
PART IV
 
Item 15.  Exhibit, Financial Statement Schedules.
 
(a)(1) Financial Statements
 
See Item 8, "Financial Statements and Supplementary Data."
 
(a)(2) Financial Statement Schedules
 
All financial statement schedules for AgFeed and its subsidiaries have been included in the consolidated financial statements or the related notes or they are either inapplicable or not required.
 
(a)(3) Exhibits
 
The exhibits required by this item are set forth on the Exhibit Index attached hereto.
 
 
54

 

AgFeed Industries, Inc. and Subsidiaries
Consolidated Financial Statements
For the Years Ended December 31, 2008, 2007, and 2006

Contents

   
Page
 
       
Report of Independent Registered Public Accounting Firm
 
F-1
 
         
Financial Statements:
       
         
Consolidated Balance Sheet as of December 31, 2008 and 2007
 
F-2
 
         
Consolidated Statements of Income and Other Comprehensive Income for the years ended December 31, 2008, 2007 and 2006
 
F-3
 
         
Consolidated Statement of Stockholders' Equity for the years ended December 31, 2008, 2007 and 2006
 
F-4
 
         
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007, and 2006
 
F-5
 
         
Notes to Consolidated Financial Statements
 
F-6 to F-29
 
 
 

 
 
Report of Independent Registered Public Accounting Firm


Board of Directors and Stockholders of
AgFeed Industries, Inc.

We have audited the accompanying consolidated balance sheets of AgFeed Industries, Inc  as of December 31, 2008 and 2007, and the related consolidated statements of income and other comprehensive income, stockholders’ equity and cash flows for the years ended December 31, 2008, 2007  and 2006. We also have audited AgFeed Industries, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). AgFeed Industries, Inc. ‘s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting.  Management’s Report on Internal Control is included in ITEM 9A of AgFeed Industries, Inc’s Form 10-K for the year ended December 31, 2008.  Our responsibility is to express an opinion on these financial statements and an opinion on the company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards required that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding on internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our audits.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AgFeed Industries, Inc. as of December 31, 2008,  and 2007, and the results of its operations and its cash flows for the years ended December 31, 2008 , 2007 and 2006, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, AgFeed Industries, Inc.  maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Management has excluded certain newly acquired entities from its assessment of internal control over financial reporting. These entities constitute 71.1% of total assets as of December 31, 2008 and 67.6% and 97.0% of revenue and  net income, respectively, for the year ended December 31, 2008. Our opinion on internal control over financial reporting also excludes these entities.
 

Goldman Parks Kurland Mohidin LLP
Encino, California
March 12, 2009
 
 
F-1

 

AgFeed Industries, Inc. and Subsidiaries
Consolidated Balance Sheet
as of December 31, 2008 and 2007
 
   
2008
   
2007
 
             
ASSETS
           
             
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 24,839,378     $ 7,696,209  
Accounts receivable, net of allowance for doubtful accounts of $520,413 and $191,497
    9,462,380       6,107,491  
Advances to suppliers
    518,829       442,851  
Other receivable
    2,066,030       459,034  
Inventory
    20,616,560       2,728,160  
Prepaid expense
    1,166,646       644,183  
Debt issue costs
    246,223       -  
                 
Total current assets
    58,916,046       18,077,928  
                 
PROPERTY AND EQUIPMENT, net
    20,810,094       3,930,715  
CONSTRUCTION-IN-PROCESS
    10,853,389       221,819  
INTANGIBLE ASSETS
    43,833,705       839,802  
OTHER ASSETS
    2,641,902       -  
                 
TOTAL ASSETS
  $ 137,055,136     $ 23,070,264  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES:
               
Accounts payable
  $ 5,214,596     $ 1,458,010  
Other payables
    5,766,741       705,150  
Unearned revenue
    321,664       99,848  
Accrued expenses
    164,558       18,223  
Accrued payroll
    818,052       168,560  
Short term loans
    -       1,110,413  
Tax and welfare payable
    465,875       9,534  
Interest payable
    121,139       -  
                 
Total current liabilities
    12,872,625       3,569,738  
                 
CONVERTIBLE NOTES, net of debt discount of $579,444 and $0
    3,220,556       -  
                 
TOTAL LIABILITIES
    16,093,181       3,569,738  
                 
COMMITMENTS AND CONTINGENCIES (Note 13)
    -       -  
                 
MINORITY INTEREST
    2,117,611       -  
                 
STOCKHOLDERS' EQUITY:
               
Common stock, $0.001 per share; 75,000,000 shares authorized; 38,300,436 issued and 37,933,141 outstanding in 2008; and 27,026,756 issued and 27,026,756 outstanding in 2007
    38,300       27,027  
Additional paid-in capital
    90,903,261       10,094,095  
Other comprehensive income
    4,167,217       780,907  
Statutory reserve
    3,236,054       752,225  
Treasury stock
    (1,811,746 )        
Retained earnings
    22,311,258       7,846,272